<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 30, 1998
REGISTRATION NO. 333-46973
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE SPORTS CLUB COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-4479735
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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11100 SANTA MONICA BLVD., SUITE 300
LOS ANGELES, CALIFORNIA 90025
310-479-5200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
D. MICHAEL TALLA
CHAIRMAN OF THE BOARD
THE SPORTS CLUB COMPANY, INC.
11100 SANTA MONICA BLVD., SUITE 300
LOS ANGELES, CALIFORNIA 90025
310-479-5200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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JOSEPH P. BARTLETT, ESQ. GLENN D. SMITH, ESQ.
KINSELLA BOESCH FUJIKAWA & TOWLE, LLP STROOCK & STROOCK & LAVAN LLP
1901 AVENUE OF THE STARS, 7TH FLOOR 2029 CENTURY PARK EAST, SUITE 1800
LOS ANGELES, CALIFORNIA 90067 LOS ANGELES, CALIFORNIA 90067
(310) 201-2000 (310) 556-5800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this form is filed to register additional securities or an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED MARCH 30, 1998
PROSPECTUS
6,000,000 SHARES
[LOGO] THE SPORTS CLUB COMPANY, INC.
COMMON STOCK
------------------------
The Sports Club Company, Inc. (the "Company") is hereby offering (the
"Offering") 6,000,000 shares of the Company's common stock, $.01 par value per
share (the "Common Stock"). The Common Stock is listed on the American Stock
Exchange ("AMEX") under the symbol "SCY." On March 25, 1998, the last sale price
of the Common Stock was $8.8125 per share, as reported by the AMEX. See "Price
Range of Common Stock." At the request of the Company, up to 600,000 shares of
Common Stock have been reserved for sale in the Offering to certain individuals,
including directors and employees of the Company, members of their families, and
other persons having business relationships with the Company. See
"Underwriting."
SEE "RISK FACTORS" COMMENCING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRE-SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------
Per Share.................................... $ $ $
- ------------------------------------------------------------------------------------------------------------
Total(3)..................................... $ $ $
============================================================================================================
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(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $450,000.
(3) The Company and certain stockholders have granted to the Underwriters an
option, exercisable within 30 days hereof, to purchase up to an aggregate of
900,000 additional shares of Common Stock at the price to the public less
underwriting discounts and commissions for the purpose of covering
over-allotments, if any. If the Underwriters exercise such option in full,
the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company and Proceeds to the selling stockholders will be
$ , $ , $ and $ , respectively. See "Principal
and Selling Stockholders" and "Underwriting."
The shares of Common Stock are being offered hereby by the several
Underwriters named herein subject to prior sale, when, as, and if accepted by
them, and subject to certain prior conditions including the right of the
Underwriters to reject orders in whole or in part. It is expected that the
delivery of such shares will be made in New York, New York, on or about
1998.
SCHRODER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
SUTRO & CO. INCORPORATED
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the consolidated financial statements and notes thereto, appearing elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under "Risk Factors." Unless otherwise indicated, the "Company" refers
to The Sports Club Company, Inc., its predecessors and its subsidiaries. Unless
otherwise indicated, the information contained in this Prospectus assumes that
the Underwriters' over-allotment option will not be exercised.
THE COMPANY
The Sports Club Company, Inc. operates sports and fitness clubs ("Clubs"),
primarily under the "Sports Club" and "Spectrum Club" names. Sports Clubs have
been developed as "urban country clubs" offering a full range of services,
including numerous fitness and recreation options, diverse facilities and other
amenities. Spectrum Clubs are designed as smaller-scale Sports Clubs with an
extensive but smaller range of services. Both Sports Clubs and Spectrum Clubs
are marketed to affluent, health conscious individuals who desire a premier
Club. The membership fees at Sports Clubs are higher than membership fees
charged at Spectrum Clubs; membership fees at both Clubs are higher than those
charged by most other Clubs, which do not provide as many services.
The Company currently owns interests in 14 Clubs. In 1997 the Company
acquired a Club in Henderson, Nevada which is now operated as The Sports
Club/Las Vegas, acquired four Clubs in Southern California which are now
operated as Spectrum Clubs and opened a Spectrum Club in Valencia, California.
The Company currently operates The Sports Club/LA, The Sports Club/Irvine, the
Reebok Sports Club/NY and The Sports Club/Las Vegas, and operates 10 Spectrum
Clubs in Southern California.
The Company's strategy is to develop and acquire multi-amenity Clubs
complementary to existing Sports Clubs and Spectrum Clubs and to develop and
implement new programs at existing Clubs to expand membership and increase
revenues. The Company intends to develop and acquire Sports Clubs in selected
metropolitan areas where a sufficient potential membership base exists to
support a 80,000 square foot or larger facility. To expand the Spectrum Club
name and concept, the Company intends to develop and acquire suitable Clubs
located in or adjacent to metropolitan areas either near a Sports Club or in
areas where the potential membership base is significant but will not support a
Sports Club facility. The Company is currently developing additional Sports
Clubs in several locations including New York, New York, Washington, D.C.,
Houston, Texas, San Francisco, California, and Boston, Massachusetts, and
Spectrum Clubs in Anaheim Hills, Puente Hills and Thousand Oaks, California. The
Clubs are expected to open from late 1998 through 2001. The Company believes
that, because of the established reputation of the Company and the prestige
associated with the Sports Clubs and the Spectrum Clubs, developers view the
Clubs as valuable components of multi-use developments.
According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, revenues generated by the
United States fitness club industry increased at a compound annual rate of 9.4%
from $5.5 billion in 1991 to $8.6 billion in 1996. Over the same period,
memberships in all Clubs have grown at a 4.5% compound annual growth rate, to
20.8 million. Both Club revenues and memberships have benefited from the
increasing awareness among the general public of the importance of physical
exercise. The sports and fitness Club industry is highly fragmented and
competitive. According to IHRSA, there were more than 13,000 Clubs in operation
during 1996. According to Club Industry magazine, however, the ten largest
companies in the industry account only for approximately 15% of all industry
revenue and own less than 10% of all Clubs. The Company believes that these
factors, among others, provide an opportunity for continued revenue growth for
Clubs such as Sports Clubs and Spectrum Clubs.
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The Company believes that it possesses one of the most experienced
management teams in the industry. Four of the Company's executives each have
more than 18 years experience in the Club industry and have been working for the
Company and its predecessors for more than ten years. Management believes that
it has the depth and experience to manage the Company's internal and external
growth.
THE OFFERING
COMMON STOCK OFFERED................ 6,000,000 shares(1)
COMMON STOCK TO BE OUTSTANDING AFTER
THE OFFERING........................ 20,218,645 shares(2)
USE OF PROCEEDS..................... Of the approximately $49.8 million
estimated net proceeds of the Offering,
approximately $38.8 million will be
used to repay outstanding indebtedness
and the balance will be used for
general corporate purposes, including
to acquire and develop new Clubs. See
"Use of Proceeds".
AMEX COMMON STOCK SYMBOL............ SCY
- ---------------
(1) Does not include up to 800,000 shares to be issued by the Company and up to
100,000 shares to be sold on a pro rata basis by certain stockholders upon
exercise of the Underwriter's over-allotment option (see "Underwriting" and
"Principal and Selling Stockholders").
(2) Does not include 1,038,000 additional shares reserved for issuance under the
Company's employee and director stock plans at December 31, 1997 under which
there were outstanding options to purchase 642,500 shares at a weighted-
average exercise price of $3.77 per share. Options were exercised for 2,667
shares subsequent to December 31, 1997. Also does not include 159,081 shares
reserved for issuance on December 31, 1998, as consideration for the four
Spectrum Clubs acquired from Racquetball World (see "The Company").
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA AND OTHER DATA)
The following summary consolidated financial and other data of the Company
are as of the end of and for each of the years in the three-year period ended
December 31, 1997, and are derived from the audited consolidated financial
statements of the Company. The information contained in this table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's historical consolidated
financial statements, including the notes thereto, appearing elsewhere herein.
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<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
STATEMENT OF INCOME DATA: ------- ------- -------
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Revenues.................................................... $34,659 $36,918 $61,154
Operating expenses:
Direct.................................................... 21,730 22,989 43,517
Selling, general and administrative....................... 5,486 6,052 6,607
Depreciation and amortization............................. 2,775 2,490 3,919
------- ------- -------
Total operating expenses............................... 29,991 31,531 54,043
------- ------- -------
Income from operations................................. 4,668 5,387 7,111
Other Income (expense):
Interest.................................................. (2,600) (2,682) (3,206)
Minority interests........................................ (150) (150) (22)
Equity interest in net income of unconsolidated
subsidiaries........................................... 860 631 696
Non-recurring items....................................... -- (300) (2,025)
------- ------- -------
Total other income (expense)........................... (1,890) (2,501) (4,557)
------- ------- -------
Income before income taxes............................. 2,778 2,886 2,554
Provision for income taxes.................................. 1,139 1,183 1,014
------- ------- -------
Net income................................................ $ 1,639 $ 1,703 $ 1,540
======= ======= =======
Net income per share:
Basic..................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Diluted................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Net income per share before non-recurring items (Basic and
Diluted).................................................. $ 0.14 $ 0.17 $ 0.22
======= ======= =======
Weighted-average number of common shares outstanding:
Basic(1).................................................. 11,353 11,355 12,524
======= ======= =======
Diluted(1)................................................ 11,357 11,360 12,683
======= ======= =======
OTHER DATA:
Total Clubs operated at end of period....................... 8 8 14
Average membership during the period........................ 42,368 45,219 51,038
Members at end of period.................................... 44,114 45,220 75,269
</TABLE>
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<CAPTION>
AT DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED (2)
BALANCE SHEET DATA: -------- ---------------
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Cash and cash equivalents................................... $ 1,581 $ 18,651
Property, plant and equipment............................... 106,791 106,791
Total assets................................................ 131,561 148,331
Long-term debt, including current installments.............. 50,798 20,887
Stockholders' equity........................................ 58,477 106,336
</TABLE>
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(1) Does not include up to 159,081 shares reserved for issuance on December 31,
1998, as consideration for the acquisition of the Spectrum Clubs acquired
from Racquetball World (see "The Company").
(2) As adjusted to give effect to the issuance and sale of the Common Stock
offered hereby at an assumed public offering price of $8.8125 per share, and
the application of the estimated net proceeds as set forth under "Use of
Proceeds."
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RISK FACTORS
An investment in the Common Stock involves a high degree of risk.
Prospective purchasers of the Common Stock offered hereby should consider the
following risk factors, in addition to the other information set forth in this
Prospectus, before purchasing any Common Stock. Certain information contained in
this Prospectus constitutes "forward-looking" statements, which statements can
be identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate" or "continue" or the negative thereof or
other variations thereon or comparable terminology. The following factors
constitute cautionary statements identifying important factors, including
certain risks and uncertainties with respect to such forward-looking statements
that could cause actual results to differ materially from those reflected in
such forward-looking statements.
ATTRACTION AND RETENTION OF MEMBERS
The Company's profitability is dependent on its ability to attract and
maintain its membership levels at its Clubs, and there can be no assurance that
it will be successful in these efforts, or that the membership levels at one or
more of its Clubs will not decline. There are numerous factors that could lead
to a decline in membership levels or that could prevent the Company from
increasing its membership at newer Clubs (at which membership is generally not
yet at a mature level), including the public image of the Clubs, the ability of
the Clubs to deliver quality service at a competitive cost, the presence of
direct and indirect competition in the areas in which the Clubs are located, the
public's interest in Clubs and general economic conditions. In addition, from
time to time the Company may close a Club and attempt to move members of such
Club to a different Club or may have to temporarily relocate members if a Club
is closed for remodeling or due to fire, earthquake or other casualty. In such
cases, the inability of the Company to successfully transfer and retain members
will lead to an overall membership decline. Additionally, conditions in the
markets in which the Company operates may limit the Company's ability to
maintain or increase membership pricing without a material loss in membership.
As a result of these factors, there can be no assurance that the Clubs'
membership levels will be adequate to maintain or permit the expansion of their
operations.
ABILITY TO DEVELOP AND ACQUIRE ADDITIONAL CLUBS
The Company's strategy is to develop and acquire premier Clubs in order to
respond to the public's demand for a wide variety of sports, fitness and social
activities. However, there can be no assurance that such new Clubs will be
developed or acquired. The successful development of new Clubs will depend on
various factors, including the ability of the Company to obtain financing, the
availability of suitable sites for Clubs, the ability of the Company to
successfully negotiate satisfactory lease and other contracts and to meet
construction schedules and budgets, and the degree to which the Company can
attract members to the newly developed Clubs. The successful acquisition of new
Clubs will depend on similar factors, including the ability of the Company to
obtain financing, the competitive environment for acquisitions, the ability of
the Company to improve operations or other aspects of the Clubs, and the ability
of the Club to retain existing and attract new members, which will depend upon
the degree to which existing and potential members are receptive to the
Company's policies, including higher membership fees. As a result of the
foregoing, there can be no assurance that the Company will be able to develop or
otherwise acquire any particular Club, that it will be able to expand into areas
which it has targeted or that the Company's expansion will not adversely affect
its operations. Additionally, recently-opened Clubs which have not yet achieved
maturity generally operate at a loss or at only a slight profit during their
first years of operation as a result of fixed expenses which, together with
variable operating expenses, approximate or exceed membership fees and other
revenues. The various risks associated with the Company's development and
acquisition of Clubs and uncertainties regarding the profitability of such
operations could have a material adverse effect on the Company's financial
condition and results of operations.
4
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Currently, the Company is in the process of integrating the operation of four
Spectrum Clubs acquired in December 1997. See "The Company."
NEED FOR ADDITIONAL FINANCING
Expansion of the Company's operations through the development and
acquisition of additional Clubs will require substantial amounts of capital. The
Company's existing credit facility terminates 60 days following the Offering;
the Company is in the process of negotiating to renew, extend or replace its
existing credit facility. There can be no assurance that such credit facility
will be renewed, extended or replaced in a timely manner, if at all. The
availability of financing may affect the Company's ability to expand. To finance
expansion, the Company may seek additional borrowings, and may seek further
equity investments. The Company will also consider entering into joint venture
and partnership agreements for the purpose of developing new Clubs. There can be
no assurance that funds for such expansion, whether from equity or debt
financings or other sources, will be available or, if available, will be on
terms satisfactory to the Company. The Company's future growth may be limited if
it is unable to complete either the development or acquisition of new Clubs due
to a lack of satisfactory financing alternatives, which would have a material
adverse effect on the Company.
RISKS INVOLVED IN DEVELOPMENT ACTIVITIES THROUGH PARTNERSHIPS AND JOINT VENTURES
The Company owns interests in the Spectrum Club/Manhattan Beach and the
Reebok Sports Club/NY in partnership with other investors, and has entered, and
may continue to enter, into similar partnership or joint venture arrangements in
the future. Partnership and joint venture developments may, under certain
circumstances, present certain risks to the Company, including the possibility
that the Company's partners or co-venturers might become bankrupt and that such
partners or co-venturers might have economic or other business interests or
objectives that are inconsistent with the Company's interests or objectives.
Such partners or co-venturers may also be in a position to take actions contrary
to the Company's interests and objectives and cause delays or impasses which may
prevent the Company from implementing business decisions with respect to the
partnerships and joint ventures. These risks are heightened in Clubs (such as
the Spectrum Club/ Manhattan Beach and the Reebok Sports Club/NY) where the
Company's partners may, under certain circumstances, have the right to assert
control over the day-to-day operations of the Clubs. In addition, the Company's
agreements relating to the Reebok Sports Club/NY prohibit the Company from
opening or engaging in pre-sale activities relating to a sports and fitness Club
which exceeds 30,000 square feet prior to June 1999 in New York City or within a
10 mile radius of the Reebok Sports Club/NY. There can be no assurance that the
foregoing factors will not have a material adverse effect on the Company's
results of operation and financial condition.
RELATIONSHIP WITH MILLENNIUM; CONFLICTS OF INTEREST
Millennium Entertainment Partners, L.P., along with its affiliates
(collectively, "Millennium") is the second largest shareholder of the Company,
with 3,929,863 shares or 27.6% of the outstanding Common Stock. Additionally,
Millennium is a partner with the Company in the Reebok-Sports Club/ NY
partnership as well as the landlord of the building in which the Reebok Sports
Club/NY is located. In 1997, Millennium and the Company entered into leases with
respect to the development of two additional Sports Clubs in Washington, D.C.
and San Francisco, California, and are currently negotiating the terms of a
lease for an additional Sports Club in Boston, Massachusetts (see
"Business -- Acquisition and Development of Additional Clubs"). In addition, the
Company and Millennium entered into agreements in March 1998 pursuant to which
Millennium will acquire and develop or finance the acquisition and development
of sites for Sports Clubs in La Jolla, California and Houston, Texas. On June
11, 1997, the Company issued to Millennium 2,105,263 shares of Common Stock in
exchange for $10.0 million consisting of $5.0 million in cash and certain
interests of Millennium in the Reebok-Sports Club/NY partnership, including a
9.9% interest in the partner-
5
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ship and a $2.5 million promissory note issued by the partnership. The Company
also granted to Millennium certain registration and preemptive rights, which
preemptive rights have been waived with respect to the Offering. In addition,
the Company and certain of its shareholders have agreed to cause a nominee of
Millennium to be appointed or elected to the Board of Directors of the Company;
Brian J. Collins, an officer of Millennium, is currently a member of the
Company's Board of Directors as Millennium's nominee. On December 31, 1997, the
Company sold to Millennium an additional 625,000 shares of Common Stock for $5.0
million to fund the acquisition of four Spectrum Clubs from Racquetball World.
In addition, Millennium provided a capital lease for two such Spectrum Clubs.
Millennium has the right to require the Company to purchase the property under
certain circumstances, including consummation of the Offering. Millennium has
agreed to waive this right with respect to the Offering. The Company intends to
utilize a portion of the proceeds of the Offering to repurchase such properties.
However, if the net proceeds from the Offering are insufficient to fund all of
the Company's intended use of proceeds, the requirement that the Company
purchase the Racquetball World property from Millennium could have a material
adverse effect on the Company's financial condition and results of operation. In
addition, through its rights under its various agreements with the Company,
Millennium may have the ability to advance its economic or business interests or
objectives which may conflict with those of the Company and cause delays which
would not be in the Company's best interest. Any such conflict or delay could
have a material adverse effect on the Company's financial condition and results
of operations. See "Certain Transactions."
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
Upon consummation of the Offering, the Company's principal shareholders,
officers, directors and their affiliates will beneficially own, in the
aggregate, approximately 50.2% of the outstanding shares of the Common Stock
(approximately 47.9% assuming the full exercise of the Underwriters'
over-allotment option). As a result, such persons, acting together, will
continue to have control over all matters requiring shareholder approval. The
concentration of ownership under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.
DEPENDENCE ON SINGLE GEOGRAPHIC AREA
Although the Company is in the process of developing Clubs in other areas,
currently all operating Clubs other than the Reebok Sports Club/NY and The
Sports Club/Las Vegas are located in Southern California and thus the operating
results of the Company are susceptible to events in this area, including natural
disasters. All of the Clubs maintain comprehensive casualty, liability and
business interruption insurance and all Clubs located in California maintain
earthquake insurance. The Company believes that its insurance coverage is in
accordance with industry standards. There are, however, certain types of losses
which may be either uninsurable or not economically insurable. Accordingly,
there can be no assurance that any insurance proceeds will adequately compensate
for all economic consequences of any loss. Should an uninsured loss occur, the
Company could lose both its invested capital in a particular Club or Clubs and
its anticipated profits from such Club or Clubs. Any such event could have a
material adverse effect on the Company's financial condition and results of
operations.
COMPETITION
The sports and fitness industry is highly competitive. Despite recent
consolidation activities, the industry remains highly fragmented. Some of the
Company's competitors are significantly larger and have greater financial and
operating resources than the Company. In addition, a number of individual and
regional operators compete with the Company throughout the Company's existing
and targeted markets. These competitors compete with the Company both for
members and for acquisitions of other Clubs. The Company also competes with
recreational facilities established by governments and businesses, the YMCA and
YWCA, country clubs and weight-reducing salons, as well as products and services
that can be used in the home. Other entertainment and retail businesses also
compete with the Company for the discretionary income of its target market. The
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Company believes that additional sports and fitness competitors will emerge in
the future, some of which may be larger and have greater financial and operating
resources than the Company. There can be no assurance that such competition will
not have a material adverse effect on the Company's financial condition and
results of operations.
HEALTH RISKS
Use of the Company's fitness Clubs poses some potential health risks to
members or guests through exertion and use of the Company's services and
facilities including exercise equipment. There can be no assurance that a claim
against the Company for death or an injury suffered by members or their guests
while exercising at a Club will not be asserted or that the Company would be
able to successfully defend any claim that might be asserted. The Company
currently maintains general liability coverage; however, there can be no
assurance that the Company will be able to maintain such liability insurance on
acceptable terms in the future or that such insurance will provide adequate
coverage against potential claims.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at federal, state and, in some cases, local levels. General rules and
regulations of the Federal Trade Commission (the "FTC"), and of state and local
consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale of memberships
and the financing and collection of membership fees. Although the Company is not
aware of any proposed material changes in any such statutes, rules or
regulations, any changes could have a material adverse effect on the Company's
financial condition and results of operations.
STAFFING AND LABOR COSTS
The Company is dependent upon the available labor pool of semi and
unskilled employees. The Company is also subject to the Fair Labor Standards
Act, which governs such matters as a minimum wage, overtime and other working
conditions. A shortage in the labor pool or other general inflationary pressures
or changes in applicable laws and regulations could require the Company to
enhance its wage and benefits packages. There can be no assurance that the
Company's labor costs will not increase. Any increase in such costs could have a
material adverse effect on the Company's financial condition and results of
operations.
DEPENDENCE UPON KEY PERSONNEL
The Company is dependent upon the efforts and skills of its executive
officers, who have substantial experience in the sports and fitness club
industry. The loss of one or more of such officers could have a material adverse
impact on the Company's operations. In addition, the development and expansion
of the Company's business will require additional experienced management and
operations personnel. No assurance can be given that such employees will be
available to, or can be retained by, the Company.
CERTAIN ANTI-TAKEOVER CHARTER PROVISIONS AND EFFECTS OF DELAWARE LAW; CLASSIFIED
BOARD MAY DELAY OR PREVENT CORPORATE TAKE-OVER
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which may have the effect of deterring
hostile takeovers or delaying changes in control of the Company. The Company
also has a classified Board of Directors such that less than a majority of the
members of the Board are elected at each annual meeting of shareholders.
Classified boards may have the effect of delaying, deferring or discouraging
changes in control of the Company. In addition, the Board of Directors has
authority to issue up to 1,000,000 shares of Preferred Stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
these shares without any further vote or action by the stockholders. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any such Preferred Stock that may be issued in
the future. The issuance of Preferred Stock, while
7
<PAGE> 11
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. In addition, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. Furthermore, certain provisions of Delaware law could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
following the Offering could have an adverse effect on the market value of the
Common Stock. Upon completion of the Offering, the Company will have outstanding
20,221,312 shares of Common Stock, or 21,021,312 shares if the Underwriters'
over-allotment option is exercised in full. Of these shares, all of the Common
Stock being sold hereby and 11,200,691 shares held by existing stockholders
will, subject to the agreements described below, be freely tradeable (unless
such shares are held by an "affiliate" of the Company as such term is defined in
the Securities Act of 1933, as amended (the "Securities Act"), without
restriction or registration under the Securities Act. The remaining 3,020,621
shares were issued and sold by the Company in private transactions ("Restricted
Shares") and are eligible for public sale only if registered under the
Securities Act or sold in accordance with Rule 144 thereunder. 2,395,621 of
these shares have been registered for public sale under the Securities Act. The
Company has reserved 1,035,333 shares of Common Stock for issuance under the
1994 Stock Incentive Plan and the 1994 Stock Compensation Plan, options to
purchase 637,833 shares of which are outstanding. The Company and its officers,
directors and certain shareholders owning an aggregate of 10,316,398 shares of
Common Stock and options to acquire 385,000 shares of Common Stock have agreed
with Schroder & Co. Inc. not to, directly or indirectly, sell or otherwise
transfer any interest in the Common Stock for a period of 90 days following the
Offering without the consent of Schroder & Co. Inc. Schroder & Co. Inc. may, in
its sole discretion and at any time without notice, allow the sale of all or any
portion of such Common Stock. No predictions can be made as to the effect, if
any, that market sales of Common Stock or the availability of Common Stock for
sale will have on the market price prevailing from time to time. Sale of a
substantial number of shares of Common Stock in the public market following the
Offering could have an adverse effect on the market value of the Common Stock.
See "Shares Eligible for Future Sale."
VOLATILITY OF PRICE OF COMMON STOCK
The market price of the securities offered hereby could be subject to
significant fluctuations in response to various factors and events, including
the liquidity of the market for securities offered hereby, variations in the
Company's operating results or the operating results of other sports and fitness
companies, changes in general conditions in the economy, the sports and fitness
industry, or other developments affecting the Company, its competitors or the
financial markets, could cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market has recently experienced broad
price and volume fluctuations that have often been unrelated to the operating
performance of particular companies. These market fluctuations could have an
adverse effect on the market value of the Common Stock. See "Price Range of
Common Stock and Related Matters."
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not anticipate that it will do so in the foreseeable future. It is the
Company's present policy to retain earnings for use in its operations and the
expansion of its business. In addition, the Company's ability to pay cash
dividends is limited by its current financing agreements and may be similarly
limited by future financing agreements.
8
<PAGE> 12
THE COMPANY
The Sports Club Company, Inc. (the "Company") operates sports and fitness
clubs ("Clubs"), primarily under the "Sports Club" and "Spectrum Club" names.
The Company currently owns interests in 14 Clubs. The Company's strategy is to
develop and acquire multi-amenity Clubs complementary to existing Sports Clubs
and Spectrum Clubs and to develop and implement new programs at existing Clubs
to expand membership and increase revenues. In 1997, the Company acquired and
developed the Clubs described below:
Racquetball World Acquisition. In December 1997, the Company acquired four
Spectrum Clubs from Racquetball World for a total purchase price of
approximately $19.4 million, consisting of $6.0 million in cash, $10.0 million
in capital lease financing from Millennium, the assumption of $2.0 million of
debt and the agreement to issue to the Sellers up to 159,081 shares of Common
Stock (the shares of Common Stock will be issued to Sellers on December 31,
1998, and are subject to reduction if certain liabilities of the Clubs exceed
agreed-upon amounts). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Certain Transactions."
The buildings in which the four Clubs are situated consist of approximately
323,000 square feet, and reported gross revenues of approximately $8.9 million
during the 12 months ended September 30, 1997. The Company expects to spend
approximately $4.0 million over the next 12 months in order to renovate the
Clubs and $2.0 million for new equipment at the Clubs. The Company is
introducing various fitness programs and services typically offered at Spectrum
Clubs, and is evaluating the introduction of spa and physical therapy services
at the Clubs. The Company intends to initiate increases in membership fees in
conjunction with making the foregoing improvements. The foregoing changes are
designed to attract and retain members at these facilities, and to increase
revenues both from membership fees and auxiliary services.
The Sports Club/Las Vegas. The Company acquired The Sports Club/Las Vegas
in August 1997 for a total purchase price of approximately $6.7 million
consisting of approximately $4.3 million in cash, $750,000 in equipment
financing and the issuance of 290,358 shares of Common Stock. The Club, located
in Henderson, Nevada (approximately three miles east of the Las Vegas airport),
consists of a 136,000 square foot facility and offers members services
comparable to other Sports Clubs. This Club reported revenues of $5.6 million
during the 12 months ended December 31, 1997. The Company has implemented a
capital improvement plan at this Club totalling approximately $1.0 million to
expand the fitness areas, upgrade the locker facilities and purchase new
equipment. The Company also plans to enhance revenues at this facility by
directly providing certain services, including private training, pro shop and
spa, that were previously contracted out to third parties. The foregoing changes
are designed to attract and retain members at these facilities, and to increase
revenues both from membership fees and auxiliary services.
Spectrum Club/Valencia. In July 1997, the Company completed development and
opened the Spectrum Club/Valencia. This 57,000 square foot Club is situated in a
fast-growing, affluent community north of Los Angeles. The Club was developed at
a cost to the Company of approximately $4.0 million and opened with 3,527
members, a figure which had increased to 5,443 at January 31, 1998. The Club
provides facilities and other services comparable to other Spectrum Clubs. The
Company has developed specific programming to accommodate the needs of this
suburban community and will soon expand this Club and add additional programming
focused on youth and teen activities.
Additional Acquisitions and Developments. As discussed in
"Business -- Acquisition and Development of Additional Clubs," the Company is
currently developing additional Sports Clubs and Spectrum Clubs in California,
Massachusetts, New York, Texas, and Washington, D.C.
The Company's executive offices are located at 11100 Santa Monica
Boulevard, Suite 300, Los Angeles, California 90025, and its telephone number is
310-479-5200.
9
<PAGE> 13
USE OF PROCEEDS
The net proceeds of the Offering (after deducting discounts, commissions,
estimated fees and other expenses in connection with the Offering) are estimated
to be approximately $49.8 million (or approximately $56.5 million if the
Underwriters' over-allotment is exercised in full). Such proceeds will be used
to (i) retire existing indebtedness and (ii) for general corporate purposes,
which may include the development and acquisition of Clubs. Except as described
herein, the Company currently has no binding agreement or understanding with
respect to any future acquisition. Pending the uses outlined in this table, the
Company will invest the net proceeds in short-term investment-grade, interest
bearing securities. The Company is currently in the process of negotiating to
renew, extend or replace its credit facility which terminates sixty days
following the consummation of the Offering. Until the Company has in place such
facility, the Company may delay payment of one or more of the obligations
described below. In the event that the Company is unable to renew, extend or
replace its credit facility on acceptable terms, the Company may elect not to
repay the Spectrum Club/Agoura Hills note and will instead use the funds for
general corporate purposes.
The following table summarizes the uses of the proceeds (amounts shown are
in millions):
<TABLE>
<S> <C>
Prepay The Sports Club/LA note(1)........................... $25.0
Repay credit facility(2).................................... 11.3
Prepay Spectrum Club/Agoura Hills note(3)................... 2.5
General corporate purposes.................................. 11.0
</TABLE>
- ---------------
(1) Prepayment of all outstanding obligations under the note between AT&T
Commercial Finance Corporation ("AT&T") and L.A./Irvine Sports Clubs, Ltd.
("The Sports Club/LA Note"), currently estimated to be approximately $22.2
million, plus a prepayment fee of approximately $2.8 million. The Sports
Club/LA Note bears interest at a rate per annum equal to 10.63% and requires
monthly installment payments of approximately $262,000 with the remaining
principal balance of approximately $17.5 million due and payable on April 1,
2003. The Sports Club/LA Note may be extended by the Company for a period of
five years under certain circumstances. The Sports Club/LA Note is not
subject to prepayment until April 1, 2000; however, AT&T has agreed to
permit the Company to prepay the loan on or before April 30, 1998 provided
it pays a prepayment fee estimated to be approximately $2.8 million. The
Sports Club/LA Note is secured by The Sports Club/LA.
(2) Payment of all amounts outstanding under the Company's credit facility in
the amount of $15.0 million. On December 31, 1997, approximately $5.0
million was outstanding under this facility. On March 20, 1998, the amount
outstanding on this facility was approximately $11.3 million. The advances
under the credit facility have been used by the Company to develop Clubs and
to provide working capital. The Company may borrow funds under this facility
until the earlier of June 30, 1998 or consummation of certain financing
transactions by the Company, including the Offering; provided that, with
respect to the Offering, the Bank has agreed that the facility will not
terminate until 60 days following consummation of the Offering. Upon
consummation of such a financing transaction, the facility is due and
payable in full; otherwise, the Company will be required to make monthly
payments of $250,000 beginning July 1, 1998, with all remaining amounts
becoming due and payable on October 30, 1998. Advances under the facility
bear interest at a variable rate equal to LIBOR plus 2 1/2% or the lender's
prime rate plus 1/2%. At February 25, 1998, the advances accrued interest
at the weighted-average rate of 8.33% per annum.
(3) Prepayment of all outstanding obligations under a note between Hawthorne
Savings and Loan Association and the Company. The note bears interest at a
rate per annum equal to 8.5%. The principal is payable in monthly payments
of approximately $20,000 with a final maturity in April 2024. This note is
secured by the Spectrum Club/Agoura Hills.
10
<PAGE> 14
PRICE RANGE OF COMMON STOCK AND RELATED MATTERS
The Common Stock is traded on the AMEX under the symbol "SCY." The
following table sets forth the quarterly high and low sale prices for the Common
Stock for the periods indicated, as reported by the AMEX.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
----------------
CALENDAR QUARTER HIGH LOW
---------------- ------ ------
<S> <C> <C>
Year Ended December 31, 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
Year Ended December 31, 1997:
First Quarter............................................. 5.125 2.625
Second Quarter............................................ 5.375 4.125
Third Quarter............................................. 8.875 5.250
Fourth Quarter............................................ 9.500 7.750
Year Ending December 31, 1998:
First Quarter (through March 25, 1998).................... 9.188 8.250
</TABLE>
As of March 25, 1998, there were 48 stockholders of record of the Company's
Common Stock. As of March 25, 1998, the closing price of the Common Stock, as
reported by AMEX, was $8.8125.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock
and does not anticipate that it will do so in the foreseeable future. It is the
Company's present policy to retain earnings for use in its operations and the
expansion of its business. In addition, the Company's ability to pay cash
dividends is limited by its current financing agreements and may be similarly
limited by future financing agreements.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, and as adjusted to give effect to the Offering and the
application of the estimated net proceeds therefrom. See "Use of Proceeds." This
table should be read in conjunction with the consolidated financial statements,
and the related notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Current installments of notes payable and capitalized lease
obligations, including notes payable to bank (1).......... $ 7,975 $ 2,176
======== ============
Notes payable and capitalized lease obligations, less
current installments...................................... $ 42,823 $ 18,711
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; 14,382,621 shares issued and outstanding at
December 31, 1997; 20,382,621 shares issued and
outstanding as adjusted for the Offering(2)............ 144 204
Additional paid-in capital................................ 53,613 103,334
Retained earnings......................................... 5,674 3,752(3)
Less: Treasury stock, at cost, 163,976 shares............. (954) (954)
-------- ------------
Total shareholders' equity........................ 58,477 106,336
-------- ------------
Total capitalization.............................. $101,300 $ 125,047
======== ============
</TABLE>
- ---------------
(1) As of December 31, 1997, the Company had approximately $5.0 million
outstanding under its bank credit facility. On March 20, 1998, approximately
$11.3 million was outstanding under such facility.
(2) Does not include up to 159,081 shares reserved for issuance on December 31,
1998, as consideration for the acquisition of the Spectrum Clubs acquired
from Racquetball World (see "The Company"). Also does not include 1,038,000
additional shares reserved for issuance under the Company's employee and
director stock plans under which there are currently outstanding options to
purchase 642,500 shares at a weighted-average exercise price of $3.77 per
share.
(3) Gives effect to the write-off of deferred financing costs equal to $300,000
and prepayment fees of approximately $2.8 million relating to repayment of
indebtedness with the net proceeds of the Offering, net of income tax
benefit.
12
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data presented below under the captions
"Statement of Income Data" and "Balance Sheet Data" are as of the end of and for
each of the years in the five-year period ended December 31, 1997, and are
derived from the consolidated financial statements of the Company. The
information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's historical consolidated financial statements,
including the notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993(2) 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................................. $13,195 $18,846 $34,659 $36,918 $61,154
Operating expenses:
Direct.................................................. 6,456 10,525 21,730 22,989 43,517
Selling, general and administrative..................... 3,247 3,166 5,486 6,052 6,607
Depreciation and amortization........................... 1,546 1,510 2,775 2,490 3,919
------- ------- ------- ------- -------
Total operating expenses......................... 11,249 15,201 29,991 31,531 54,043
------- ------- ------- ------- -------
Income from operations(1)........................... 1,946 3,645 4,668 5,387 7,111
Other income(expense):
Interest................................................ (538) (1,213) (2,600) (2,682) (3,206)
Minority interests...................................... -- (29) (150) (150) (22)
Equity interest in net income of unconsolidated
subsidiaries.......................................... 212 641 860 631 696
Non-recurring items..................................... -- -- -- (300) (2,025)
------- ------- ------- ------- -------
Total other income (expense)..................... (326) (601) (1,890) (2,501) (4,557)
------- ------- ------- ------- -------
Income before income taxes(1)....................... 1,620 3,044 2,778 2,886 2,554
Provision for income taxes(1)............................. 645 1,244 1,139 1,183 1,014
------- ------- ------- ------- -------
Net income....................................... $ 975 $ 1,800 $ 1,639 $ 1,703 $ 1,540
======= ======= ======= ======= =======
Net income per share:
Basic................................................... $ 0.14 $ 0.23 $ 0.14 $ 0.15 $ 0.12
======= ======= ======= ======= =======
Diluted................................................. $ 0.14 $ 0.23 $ 0.14 $ 0.15 $ 0.12
======= ======= ======= ======= =======
Net income per share before non-recurring items (Basic and
Diluted)................................................ $ 0.14 $ 0.23 $ 0.14 $ 0.17 $ 0.22
======= ======= ======= ======= =======
Weighted-average number of common shares outstanding:
Basic................................................... 6,850 7,836 11,353 11,355 12,524
======= ======= ======= ======= =======
Diluted(3).............................................. 6,850 7,836 11,357 11,360 12,683
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 209 $ 5,042 $ 1,545 $ 4,146 $ 1,581
Current assets........................................... 2,478 7,398 7,147 7,341 4,926
Property and equipment, net.............................. 2,794 59,811 59,956 72,736 106,791
Total assets............................................. 11,561 81,676 83,161 95,697 131,561
Deferred membership revenue.............................. 2,503 5,878 5,614 7,481 9,936
Current liabilities...................................... 5,480 11,194 11,355 14,159 26,844
Long-term debt including current installments............ 4,818 33,489 32,913 38,497 50,798
Shareholders'/Owners' equity............................. 2,780 37,823 39,491 41,202 58,477
</TABLE>
- ---------------
(1) Prior to October 20, 1994, the Company operated through various partnerships
and corporations. Historical data for periods through October 20, 1994, have
been adjusted to reflect compensation and tax provisions as if the Company
had operated as a corporation during such period.
(2) 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 year ended December 31, 1993
are not comparable to future periods.
(3) Does not include up to 159,081 shares to be issued on December 31, 1998, as
consideration for the acquisition of the Spectrum Clubs acquired from
Racquetball World.
13
<PAGE> 17
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 herein.
The Reebok Sports Club/NY was accounted for under the equity method of
accounting until December 30, 1996, at which time the Company acquired a
majority interest in the Club and, as a result, the operations of the Reebok
Sports Club/ NY were consolidated with those of the Company. The Spectrum
Club/Manhattan Beach is accounted for under the equity method of accounting.
In July 1997, the Company opened the Spectrum Club/Valencia and, in August
1997, acquired a Club located in Henderson, Nevada which is operated as The
Sports Club/Las Vegas in a transaction accounted for as a purchase. On December
31, 1997, the Company acquired four Clubs from Racquetball World in a
transaction accounted for as a purchase; these Clubs are located in Southern
California and are now operated as Spectrum Clubs. Seasonal factors have not had
a significant effect on the Company's operating results.
RESULTS OF OPERATIONS
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Revenues for the year ended December 31, 1997, were $61.2 million, compared
to $36.9 million for 1996, an increase of $24.3 million or 65.9%. An increase of
$18.1 million resulted from the inclusion of revenues of the Reebok Sports
Club/NY, which was consolidated into the Company following the acquisition of a
majority interest in the Club on December 30, 1996. An increase of $1.6 million
resulted from the opening of the Spectrum Club/Valencia, an increase of $2.2
million resulted from the acquisition of The Sports Club/Las Vegas and an
increase of $900,000 resulted from growth at the remaining Clubs. An increase of
$1.5 million in revenues from The SportsMed Company Inc. ("SportsMed") also
contributed to the overall increase.
Direct operating expenses increased to $43.5 million for the year ended
December 31, 1997, compared to $23.0 million for 1996. The increase resulted
primarily from the inclusion of operating expenses at the Reebok Sports Club/NY
as well as the opening of the Spectrum Club/Valencia and the acquisition of The
Sports Club/Las Vegas. Direct operating expenses as a percentage of revenues
increased to 71.2% for 1997 compared to 62.3% for 1996 due to lower margins at
the Reebok Sports Club/NY and the Spectrum Club/Valencia. Newly developed Clubs
historically operate at lower margins due to various fixed expenses such as
rent, utilities and certain payroll costs until the membership base reaches a
mature level. Similarly, newly acquired Clubs may also perform at lower margins
prior to and during implementation of new policies and programs.
Selling, general and administrative expenses were $6.6 million for the year
ended December 31, 1997, compared to $6.1 million for 1996. Selling costs
increased approximately $211,000 due to the consolidation of direct selling
expenses incurred at the Reebok Sports Club/NY, the opening of the Spectrum
Club/Valencia and the acquisition of The Sports Club/Las Vegas. General and
administrative costs increased by approximately $300,000 due to increases in
corporate overhead and the addition of personnel to accommodate new Clubs.
Selling, general and administrative costs decreased as a percentage of revenue
from 16.4% for 1996 to 10.8% for 1997. This percentage decrease resulted from
the consolidation of the Reebok Sports Club/NY revenues without a corresponding
increase in general and administrative costs because the Company managed the
Club prior to the consolidation.
Depreciation and amortization expenses were $3.9 million for the year ended
December 31, 1997, compared to $2.5 million for 1996. The increase is due
primarily to the consolidation of the Reebok Sports Club/NY, the opening of the
Spectrum Club/Valencia and the acquisition of The
14
<PAGE> 18
Sports Club/Las Vegas. Interest expense was $3.2 million in the year ended
December 31, 1997, compared to $2.7 million for 1996. Interest expense of
$340,000 at the Reebok Sports Club/NY and interest on new capital lease
financings was partially offset by increased interest income due to more
available cash for investment and lower interest expenses as other indebtedness
matured.
Equity interest in net income of unconsolidated subsidiary was $696,000 for
1997 compared to $631,000 for 1996. These amounts are associated with the
Spectrum Club/Manhattan Beach's operations and the increase reflects the
Company's share of the improved profitability at that Club. Equity in the
operations of the Reebok Sports Club/NY was not significant for 1996.
The Company's net income before income taxes and non-recurring items was
$4.6 million for the year ended December 31, 1997 compared to $3.2 million for
1996. Non-recurring items for 1997 consisted of litigation settlement costs of
$2.0 million, paid to Century Entertainment Center, L.P., relating to the
closing of the Century City Spectrum Club in July 1995. Non-recurring items for
1996 consisted of a loss of $300,000 recognized on the sale of five Sports
Connection Clubs.
The Company's estimated income tax rate was 38% for the year ended December
31, 1997, and 41% for 1996, resulting in net income of $1.5 million for the year
ended December 31, 1997, compared to net income of $1.7 million in 1996. After
tax net income before non-recurring items was $2.8 million for 1997, compared to
$1.9 million for 1996. The lower tax rate for 1997 resulted from the reduction
of valuation allowances on certain deferred income tax assets. Basic and diluted
earnings per share were $.12 and $.15 for the years ended December 31, 1997 and
1996, respectively. Basic and diluted earnings per share excluding nonrecurring
items were $.22 and $.17 for the years ended December 31, 1997 and 1996,
respectively.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 were $36.9 million, compared
to $34.7 million for 1995, an increase of $2.2 million or 6.3%. 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
increased revenues from SportsMed and by $2.9 million as a result of higher
membership dues and increased ancillary revenues at existing Clubs. These
increases were partially offset by a decrease in revenues resulting from the
closure of the Spectrum Club/Century City in July 1995.
Direct operating expenses increased to $23.0 million for 1996 compared to
$21.7 million for 1995, an increase of $1.3 million, or 6.0%. SportsMed, which
was acquired on November 30, 1995, was responsible for an increase in direct
costs of $442,000, while Club operating expenses increased $858,000. Direct
operating expenses as a percentage of revenues decreased to 62.3% for 1996
compared to 62.7% for 1995. Direct operating costs without those costs
associated with SportsMed were 61.7% of revenue for 1996.
Selling, general and administrative expenses were $6.1 million for 1996
compared to $5.5 million for 1995, an increase of $600,000, or 10.9%. SportsMed
was responsible for an increase in selling, general and administrative costs of
$519,000 in 1996. The remaining increase was due to increases in corporate
overhead. As a percentage of revenues, selling, general and administrative
expenses were 16.4% for 1996 compared to 15.8% for 1995. Selling, general and
administrative expenses without those costs associated with SportsMed were 14.8%
of revenue for 1996.
Depreciation and amortization expense was $2.5 million for 1996 compared to
$2.8 million for 1995, a decrease of $300,000, or 10.7%. This decrease was
primarily due to the sale of five Sports Connection Clubs in 1996. Interest
expense was $2.7 million for 1996 compared to $2.6 million for 1995.
In 1996, equity interest in net income of unconsolidated subsidiaries was
$631,000 compared to $860,000 in 1995. The Company did not record any income
from the Sports Connections for 1996 compared to $437,000 for 1995. The 1996
amounts and $443,000 in 1995 are associated primarily
15
<PAGE> 19
with the Spectrum Club/Manhattan Beach's operations. Equity in the operations of
the Reebok Sports Club/NY was not significant during these periods.
Non-recurring items in 1996 included a $300,000 loss resulting from the
sale of five Sports Connection Clubs.
The Company's estimated income tax rate was 41% for the year ended December
31, 1996 and 1995, resulting in net income of $1.7 million for the year ended
December 31, 1996 compared to net income of $1.6 million for 1995. Basic and
diluted earnings per share were $.15 and $.14 for the year ended December 31,
1996 and 1995, respectively. Basic and diluted earnings per share excluding
non-recurring items were $.17 and $.14 for the years ended December 31, 1996 and
1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1997 and 1996, the Company generated
$4.5 million and $3.6 million of cash from operating activities, respectively.
At December 31, 1997, the Company had a cash balance of $1.6 million of which
$417,000 was held by the Reebok-Sports Club/NY partnership. The remaining $1.2
million was available for general corporate purposes.
On January 29, 1997, the Company instituted a stock repurchase program to
repurchase up to $3.0 million of the outstanding Common Stock. Pursuant to this
program, which was terminated in February 1998, the Company repurchased 184,766
shares of Common Stock at an aggregate cost of approximately $1.0 million or a
weighted-average price of approximately $5.58 per share.
In connection with the 1994 acquisition of The Sports Club/Irvine, the
seller 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 the Company's
administrative overhead relating to the Club for such year was less than
approximately $2.9 million. The Company received $500,000 in 1997 relating to
the 1996 shortfall. No further amounts will be received from the seller.
In June 1997, the Company issued 2,105,263 shares of its Common Stock to
Millennium in exchange for $5.0 million in cash and certain interests of
Millennium in the Reebok-Sports Club/NY partnership, including a 9.9% ownership
interest in and a $2.5 million note receivable from the partnership. The Company
currently owns a 60% interest in the Reebok-Sports Club/NY partnership. At
December 31, 1997, the Reebok-Sports Club/NY partnership had outstanding notes
payable of $2.6 million to a third party under a loan secured by equipment and
$3.6 million to the Company, which note is eliminated when presenting the
Company's December 31, 1997 consolidated balance sheet. The Reebok-Sports
Club/NY partnership achieved a positive operating 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 (although there can be no assurance when, if ever, such increases may
occur). The Reebok-Sports Club/NY partnership is required to pay $900,000 per
year to repay an equipment loan and $2.0 million per year to Millennium as rent.
Available cash flows of the Reebok-Sports Club/NY partnership will then be used
as follows: (i) $3.0 million per year will be used to pay to Millennium a
priority distribution, which is accounted for by the Company as additional rent
expense; and (ii) remaining cash will be distributed to the Company to satisfy
the note payable, accrued management fees and certain additional priority
distributions, which at December 31, 1997, aggregated $15.4 million. After these
amounts plus interest thereon, are paid, the Company is entitled to 60% of
future cash distributions.
In July 1997, the Company opened the 57,000 square foot Spectrum
Club/Valencia. The Company's investment in the property and equipment at this
Club was approximately $4.0 million, of which $1.0 million was obtained by
equipment financing. Amounts borrowed by the Company pursuant to this financing
arrangement are generally repayable in monthly installments over five years,
with effective interest rates ranging between 8% and 10% per annum.
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In July 1997, the Company acquired SportsTherapy Systems, Inc., a physical
therapy and rehab clinic located in Calabasas, California, for approximately
$485,000 in cash plus the assumption of various liabilities in the amount of
approximately $187,000, most of which consisted of bank indebtedness, which was
repaid during 1997.
In August 1997, the Company acquired a Club located in Henderson, Nevada
which is now operated as The Sports Club/Las Vegas. This Club reported revenues
of $5.6 million during the 12 months ended December 31, 1997. This acquisition
was completed with approximately $4.3 million of cash, equipment financing of
$750,000 and the issuance of 290,358 shares of the Company's Common Stock having
a value of approximately $1.7 million. The Company expects to invest
approximately $1.0 million over the next 12 months to make improvements to this
Club.
In December 1997, the Company acquired four Clubs from Racquetball World
for a total purchase price of approximately $19.4 million, consisting of $6.0
million in cash, $10.0 million in lease financing provided by Millennium, the
assumption of $2.0 million of debt and the agreement to issue to certain of the
selling entities ("Sellers") up to 159,081 shares of Common Stock (which shares
will be issued to Sellers on December 31, 1998, subject to reduction if certain
liabilities of the Clubs exceed agreed-upon amounts); these Clubs are now
operated as Spectrum Clubs. These Clubs reported gross revenues of approximately
$8.9 million during the 12 months ended September 30, 1997. Millennium acquired
properties underlying two of the Clubs for $10.0 million and is leasing these
properties to the Company under a financing lease agreement which is reflected
as a capital lease obligation in the Company's consolidated balance sheet. The
lease has a term of 20 years and provides for annual rent of $1.0 million for
the first 10 years and $1.2 million per year thereafter. At any time during the
first three years of the lease, the Company may purchase the leased property
from Millennium for a purchase price (currently estimated to be approximately
$10.1 million) equal to $10.0 million plus all costs incurred by Millennium in
connection with the acquisition of such property, plus an amount sufficient to
provide to Millennium a 12% compound return on its total investment. Millennium
has the right to require the Company to acquire its interest in the property at
such price if (i) the Company receives private debt financing in excess of $95.0
million; (ii) the Company receives public equity financing in excess of $20.0
million; (iii) a default (as defined in the lease) occurs; or (iv) a major
casualty occurs with respect to either property. Millennium has waived this
right in connection with the Offering. The Company sold 625,000 shares of its
Common Stock to Millennium for $5.0 million to raise capital to complete this
acquisition. The Company expects to spend approximately $4.0 million over the
next 12 months in order to renovate the recently-acquired Clubs and $2.0 million
for new equipment at these Clubs.
In December 1997, the Company acquired real property and a vacant building
in Thousand Oaks, California for $6.0 million which it expects to redevelop as a
Spectrum Club. The Company used $5.0 million of its bank credit facility to fund
this purchase. The Company expects to invest an additional $4.5 million in
development costs over a nine-month period to complete construction of this
Club. The Company has entered into a lease with respect to the development of a
Spectrum Club in Anaheim Hills, California, which is currently estimated to
require approximately $2.7 million in development funds, expected to be invested
over the next eighteen months. In March 1998, the Company entered into a lease
with respect to a Club to be built in Puente Hills, California. The Company
expects to expend approximately $500,000 over the next 12 months in connection
with the development of this Club.
In February 1998, the Company signed a lease with respect to the
development of a Sports Club at Rockefeller Center in New York City. The Company
will begin renovation of the existing space later this year and expects to
commence pre-sale activities in June 1999. The Company deposited $4.0 million
with the landlord to secure its performance under the lease agreement and
expects to spend approximately $10.8 million over the next 18 months to complete
development of this Club.
The Company has entered into lease agreements with respect to the
development of Sports Clubs in Washington, D.C. and San Francisco, California
and announced its intention to develop a Sports Club in Boston, Massachusetts.
These projects are scheduled to begin construction in early
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1998. The Company's portion of the development costs for these Clubs is
currently estimated to be approximately $9.0 million and is expected to be
invested over a 12-month period beginning in 2000.
In March 1998, the Company entered into an agreement to acquire undeveloped
land in Houston, Texas, for approximately $3.1 million, on which the Company
intends to develop a Sports Club. The Company has entered into an agreement with
Millennium pursuant to which Millennium has agreed to acquire the land and
negotiate with the Company to develop this Club. In addition, the Company will
have the right, for a period of six months, to reacquire the property from
Millennium. See "Certain Transactions". The total cost of acquiring and
developing and property is currently estimated by management to be approximately
$17.3 million.
The Company is negotiating the acquisition of a Club in New York City,
which it would close, renovate and re-open as a Sports Club. The Company is in
the process of performing due diligence on this potential acquisition. D.
Michael Talla, Chairman and Chief Executive Officer of the Company, and Rex
Licklider, Vice Chairman of the Company, intend to make a $1.0 million
non-refundable deposit in connection with the proposed acquisition (See "Certain
Transactions"). The total cost to the Company of acquiring and renovating this
Club, which is expected to take approximately 15 months, is currently estimated
to be approximately $10.0 million.
Other than as described herein and for normal replacement of fitness
equipment and remodeling of Clubs, the Company has no commitments for capital
expenditures. The Company expects to spend approximately $1.2 million during the
next 12 months to upgrade its management information systems. Equipment
financing has generally been available under capital lease arrangements. During
1996 and 1997, the Company obtained lease financing commitments aggregating
approximately $3.0 million which were used to finance new equipment at the
Spectrum Club/Valencia, to purchase equipment at The Sports Club/Las Vegas and
to finance normal capital expenditures at existing Clubs. At December 31, 1997,
$600,000 was still available under these facilities. In February 1998, the
Company received an additional $5.0 million lease financing commitment for
expected equipment additions at the recently-acquired Spectrum Clubs, the
Spectrum Club/Thousand Oaks and for normal equipment expenditures. 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. In 1997, the Company invested approximately $2.5 million in
capital expenditures other than those related to new Club development. Equipping
new Clubs requires expenditures above this level.
The Sports Club/LA Note is secured by all the assets of The Sports Club/LA.
The Sports Club/ LA Note bears interest at a rate per annum equal to 10.63% and
requires monthly installment payments of approximately $262,000 with the
remaining principal balance of approximately $17.5 million due and payable on
April 1, 2003. The Sports Club/LA Note may be extended by the Company for a
period of five years under certain circumstances. The Sports Club/LA Note is not
subject to prepayment until April 1, 2000; however, AT&T has agreed to permit
the Company to prepay the loan on or before April 30, 1998 provided it pays to
AT&T a prepayment fee estimated to be approximately $2.8 million. The Company
intends to repay The Sports Club/LA Note from the proceeds of the Offering. The
note requires the Club to maintain a debt service coverage ratio, as defined, of
1.4 to 1.0.
The Company issued a note ("The Sports Club/Irvine Note") which is secured
by land, equipment, building improvements and the building housing The Sports
Club/Irvine. The Sports Club/Irvine Note was issued in connection with the
acquisition of The Sports Club/Irvine, which bears interest at the rate of 6.0%,
requires quarterly principal payments of $125,000 (which commenced in November
1996), and requires a payment of $4.0 million on November 1, 1999.
The Company issued a note (the "Spectrum Club/Agoura Hills Note") which is
secured by the land, equipment, building improvements and the building housing
the Spectrum Club/Agoura Hills. The Spectrum Club/Agoura Hills Note was issued
to enable the Company to complete its acquisition
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of the Spectrum Club/Agoura Hills. The note bears interest at the rate of 8.5%.
Monthly principal and interest payments of $20,107 are required through the
note's maturity in April 2024.
At December 31, 1997 the Company had a $5.0 million credit facility. This
facility was fully utilized at that date. On February 23, 1998, the amount of
the facility was increased to $15.0 million. As of March 20, 1998, the amount
outstanding under the credit facility was approximately $11.3 million. The
Company may borrow funds under this facility until the earlier of June 30, 1998,
or consummation of certain financing transactions by the Company, including the
Offering; provided that, with respect to the Offering, the Bank has agreed that
the facility will not terminate until 60 days following consummation of the
Offering. Advances under the facility bear interest at a variable rate equal to
LIBOR plus 2 1/2% or the lender's prime rate plus 1/2%. At February 25, 1998,
the advances accrued interest at the weighted-average rate of 8.33% per annum.
The Company is currently in the process of negotiating to renew, extend or
replace the credit facility; however, there can be no assurance that any such
extension, renewal or replacement will occur or will occur on terms favorable to
the Company.
The net proceeds of the Offering will be used to repay approximately $38.9
million of debt, to provide funds for future developments and/or acquisitions
and for general corporate purposes. The Company's long-term capital needs are to
provide funds for the developments described above, additional development and
acquisition projects and general corporate purposes. The Company estimates that
its capital expenditures for the next 12 months on the projects currently under
development will be approximately $20.1 million, which will be financed through
the net proceeds of the Offering and credit anticipated to be available under
credit facilities, lease financings, sale/lease back arrangements and other
financing arrangements. The Company's strategy of opportunistically acquiring
and developing additional Clubs is expected to require additional capital. The
Company believes there are a number of financing alternatives available,
including commercial credit facilities, equipment financing, mortgage financing,
and public and private debt and equity offerings. The Company will also consider
entering into joint venture and partnership agreements for the purpose of
developing new Clubs. The Company believes that the estimated net proceeds of
the Offering, together with operating cash flows and available financings, will
be sufficient for the Company's working capital and capital expenditure needs
for at least the next 12 months. However, there can be no assurance that
financing will be available on commercially reasonable terms, if at all. To the
extent that the Company is unable to obtain additional financing on acceptable
terms, the Company will be forced to delay or limit its development and
acquisition plans.
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 SportsMed, 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.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period covered by that financial statement. SFAS 130 requires an enterprise
to (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Management has not
determined whether the adoption of SFAS 130 will have a material impact on the
Company's consolidated financial position or results of operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 establishes standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets, information about the revenues derived from the enterprise's
products or services, and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application. Management has not determined whether the adoption of SFAS 131
will have a material impact on the Company's financial reporting.
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BUSINESS
GENERAL
The Company operates sports and fitness Clubs primarily under the "Sports
Club" and "Spectrum Club" names. Sports Clubs have been developed as "urban
country clubs" offering a full range of services, including numerous fitness and
recreation options, diverse facilities and other amenities. Spectrum Clubs are
designed as smaller-scale Sports Clubs with an extensive but smaller range of
services. Both Sports Clubs and Spectrum Clubs are marketed to affluent, health
conscious individuals who desire a premier Club. The membership fees at Sports
Clubs are higher than membership fees charged at Spectrum Clubs; membership fees
at both Clubs are higher than those charged by most other Clubs, which do not
provide as many services.
The Company currently owns interests in 14 Clubs. In 1997 the Company
acquired a Club in Henderson, Nevada which is now operated as The Sports
Club/Las Vegas, acquired four Clubs in Southern California from Racquetball
World which are now operated as Spectrum Clubs and opened a Spectrum Club in
Valencia, California. The Company currently operates The Sports Club/ LA, The
Sports Club/Irvine, the Reebok Sports Club/NY and The Sports Club/Las Vegas and
operates 10 Spectrum Clubs in Southern California.
The Company's strategy is to develop and acquire multi-amenity Clubs
complementary to existing Sports Clubs and Spectrum Clubs and to develop and
implement new programs at existing Clubs to expand membership and increase
revenues. The Company intends to develop and acquire Sports Clubs in selected
metropolitan areas where a sufficient potential membership base exists to
support a 80,000 square foot or larger facility. To expand the Spectrum Club
name and concept, the Company intends to develop and acquire suitable Clubs
located in or adjacent to metropolitan areas either near a Sports Club or in
areas where the potential membership base is significant but will not support a
Sports Club facility. The Company is currently developing additional Clubs,
including Sports Clubs in New York, New York, Washington, D.C., San Francisco,
California, and Boston, Massachusetts, and Spectrum Clubs in Anaheim Hills,
Puente Hills and Thousand Oaks, California. These Clubs are expected to open
from late 1998 through 2001. The Company believes that, because of the
established reputation of the Company and the prestige associated with the
Sports Clubs and the Spectrum Clubs, developers view the Clubs as valuable
components of multi-use developments.
According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, revenues generated by the
United States fitness club industry increased at a compound annual rate of 9.4%
from $5.5 billion in 1991 to $8.6 billion in 1996. Over the same period,
memberships in all Clubs have grown at a 4.5% compound annual growth rate, to
20.8 million. Both Club revenues and memberships have benefited from the
increasing awareness among the general public of the importance of physical
exercise. The sports and fitness Club industry is highly fragmented and
competitive. According to IHRSA, there were more than 13,000 Clubs in operation
during 1996. According to Club Industry magazine, however, the ten largest
companies in the industry account only for approximately 15% of all industry
revenue and own less than 10% of all Clubs. The Company believes that these
factors, among others, provide an opportunity for continued revenue growth for
Clubs such as Sports Clubs and Spectrum Clubs.
The Company believes that it possesses one of the most experienced
management teams in the industry. Four of the Company's executives each have
more than 18 years experience in the Club industry and have been working for the
Company and its predecessors for more than ten years. Management believes that
it has the depth and experience to manage the Company's internal and external
growth.
The Sports Clubs
Sports Clubs are large, multi-purpose facilities, offering members and
their guests fully equipped gyms with state of the art fitness equipment, modern
programs, wellness protocols such
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as 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 Company currently has four Sports Clubs in
operation. The Sports Club/LA was opened in 1987 and The Sports Club/Irvine was
opened in 1990. The Reebok Sports Club/NY was developed in partnership with the
Company and a subsidiary of Reebok International, Ltd. ("Reebok") and
Millennium. The Company manages the operations of the Club and owns a
controlling 60% interest in the partnership that owns the Reebok Sports Club/NY
with Reebok and Millennium retaining direct interests in the partnership. The
Sports Club/Las Vegas, located in Henderson, Nevada, was acquired in August
1997.
The Sports Club/LA. The Sports Club/LA is located in West Los Angeles, near
the affluent communities of Santa Monica, Brentwood, Beverly Hills, Westwood and
Century City. The Sports Club/LA offers a 9,500 square foot coed gym, a complete
gym with equipment generally preferred by female members, a spinning room with
stationary bicycles used in an aerobic class environment and an approximately
5,800 square foot cardio-vascular deck. Personal trainers are available to
develop and supervise 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. 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.
The Sports Club/Irvine. The Sports Club/Irvine is 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 generally preferred by female members, 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. The Club offers 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.
Men's and women's locker rooms feature wood lockers and 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 sports coordinator organizes sports tournaments, leagues and classes.
Reebok Sports Club/NY. The Reebok Sports Club/NY located in Manhattan's
upper west side offers 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
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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 manages and has a controlling 60% interest in the
Reebok-Sports Club/NY partnership.
The Company's agreements relating to the Reebok Sports Club/NY prohibit the
Company from engaging in pre-sale activities or opening a Club in New York City
or within a 10-mile radius of the Reebok Sports Club/NY which exceeds 30,000
square feet in size prior to June 1999. These 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 Sports Club/Las Vegas. The Company acquired The Sports Club/Las Vegas
in August 1997. The Club services the fast growing Las Vegas market and is
situated in Henderson, Nevada approximately three miles east of the Las Vegas
airport. The Club offers 136,000 square feet dedicated to tennis, racquetball,
squash and basketball courts, an aquatic center, running track, state-of-the-art
weight training, resistance and cardiovascular facilities and junior recreation
rooms. In addition to indoor facilities, the Club has outdoor lighted tennis
courts and an outdoor swimming pool. Men's and women's locker rooms are equipped
with private showers, steam rooms and whirlpools. Full service toiletry
amenities such as towel service and complete vanity supplies are available for
members' use.
The Club offers children a number of interactive classes, as well as
supervised age-specific junior recreational rooms and many junior programs such
as gymnastics. The Club also provides a full service bar and cafe along with a
massage and skin care center. Members also have available for their use a beauty
salon, retail shop and physical therapy office which are provided within the
facility by third parties who lease space within the Club.
The Spectrum Clubs
The Company currently operates Spectrum Clubs at ten locations in Southern
California. While more limited in size and in terms of the social and
recreational options offered by Sports Clubs, 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, age and aesthetic
design and the types of exercise and work-out equipment and facilities available
to members.
Spectrum Clubs typically range in size from 30,000 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. While three of the Spectrum Clubs
acquired from Racquetball World contain sufficient space to accommodate a Sports
Club, a significant portion of the available space in such Clubs is devoted to
racquetball courts and other facilities and amenities, and the fitness and
exercise facilities in such Clubs are comparable to those typically found at
Spectrum Clubs. Certain of the Spectrum Clubs also offer indoor swimming pools,
childcare, pro shops, basketball courts, racquetball courts, physical therapy
facilities, volleyball, martial arts, dance and children's and seniors'
programs. Nine Spectrum Clubs are wholly-owned and operated by the Company. The
Company is the sole general partner, manages and receives, as its equity
interest, 46.1% of the net income generated by the operation of the Spectrum
Club/ Manhattan Beach.
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The SportsMed Company, Inc.
SportsMed operates facilities within The Sports Club/LA, The Sports
Club/Irvine, the Spectrum Club/Agoura Hills and a stand alone facility in
Calabasas, California. The clinics are staffed by exercise physiologists,
physical therapists and nutritionists who provide services to members and
others. A physician is employed by SCC Medical Group, Inc. which pays a
management fee to SportsMed. The Company believes that SportsMed provides
valuable services which are complementary to the other services provided by the
Clubs, and is considering expanding the SportsMed concept to other Clubs in the
future.
SALES AND MARKETING
The "urban country club" image is essential to the Company's overall
operating and marketing strategies. The four existing Sports Clubs 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 charging a premium
for the added amenities that come with membership in Sports Clubs. Members
include professionals, sports and entertainment personalities and business
people, and the Company believes word-of-mouth advertising from these types of
members has enhanced the reputation of Sports Clubs and generated increased
interest among prospective members.
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 Spectrum Club membership (in
terms of both initiation fees and monthly dues) is less than membership at
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 Club with which they compete. Because of
their relatively smaller size, 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 strategy is to continue to acquire and develop
Clubs 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. Both Sports
Clubs and Spectrum Clubs are marketed as multi-amenity Clubs catering to
affluent consumers, reflecting the Company's belief that prospective members are
willing to pay higher fees for well-designed, well-equipped and well-maintained
Clubs offering personalized instruction and multiple fitness and workout
options. The Company's marketing efforts at the older, more seasoned Clubs
emphasize maintaining existing members, replacing those members who leave with
new members and increasing ancillary revenues such as private training and
retail sales. The focus at the newer Clubs is on maintaining existing members
and attracting and maintaining additional members.
Word-of-mouth referrals and endorsements by existing members are the Clubs'
most important source of new members. In addition, all 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 Clubs host
corporate parties and charity benefits and often donate free or discounted
memberships to charitable organizations. The Company also conducts periodic
membership drives whereby referring members are entitled to receive special
gifts and other incentives. 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 member referrals. The Company
believes that it will be able to continue to utilize these marketing strategies
in the promotion of new Clubs.
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<PAGE> 28
The largest segment of the membership base for the Clubs consists of
health-conscious individuals. The Company targets five other groups in order to
expand membership: children and families, seniors, corporate members, medical
referrals and people who do not exercise on a regular basis. Each of these
groups requires specialized exercise/fitness programs, and the Company has
developed specific programs to attract members of these groups.
The Company believes the children/family market has considerable potential,
as younger members grow older, marry and have children, and seek recreational
activities in which the entire family can participate. To target the family
market, the Company has implemented "KidFit" and "TeenFit" programs which target
children between the ages of 5 and 17, and involve both one-on-one private
training and a six-week fitness training program. 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.
The Company anticipates that as the current core membership group ages, it
will meet this group's changing fitness needs and attract additional members
from the senior population. 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.
The corporate market is a significant source of new members, due to the
proximity of the Clubs to business centers and the use of the Clubs to conduct
business and to develop and maintain business contacts. The Company targets the
corporate membership market primarily through the Sports Clubs. Sports Clubs
employ several Corporate Membership Directors whose principal responsibilities
are to solicit corporate memberships from businesses operating in the vicinity
of Sports Clubs. Sports Clubs offer corporate group-discounted initiation fees
depending upon the number of new members involved. SportsMed has developed
several corporate wellness programs to fit the needs of this particular market.
The Company believes corporations are favorably disposed to Sports Clubs and the
SportsMed programs because of the positive impact regular exercise and overall
fitness can have on employee absenteeism, morale and productivity.
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. 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 Clubs have group aerobics classes that are
specially designed for this target group. The Company believes that it can also
attract members from the medical referral market through its SportsMed
subsidiary by offering specific rehabilitation and exercise protocols to
complement other forms of physical therapy recommended by a physician or medical
group.
EMPLOYEE TRAINING
A key component of the Company's marketing strategy is a well-trained and
knowledgeable staff. The Company has developed comprehensive training programs
which serve as educational tools to enhance the effectiveness of Company
personnel. All newly-hired employees are required to attend an 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.
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<PAGE> 29
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 is 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 consisting of five three-hour 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 Company provides additional seminars specifically-designed 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 complete 20 hours of participation and all other
membership directors are expected to complete four hours of participation every
two months. Topics covered include sales and marketing goals and recruitment and
qualification of prospective members.
MEMBERSHIP PROGRAMS
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.
The Racquet membership is currently only offered at The Sports Club/Irvine and
The Sports Club/Las Vegas and, in addition to use of the Club's facilities,
includes the unlimited use of racquetball, squash and paddle tennis courts at
The Sports Club/Irvine, and tennis at The Sports Club/Las Vegas. The Health
membership is the basic membership offering unlimited use of all facilities
excluding those privileges associated with a Racquet membership; courts are
available to holders of Health memberships for an additional fee.
Racquet and Health memberships are generally available at Spectrum Clubs.
The Spectrum Club/Fullerton currently offers executive memberships. 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
Spectrum Clubs in exchange for a small increase in monthly dues. The same
reciprocity program is generally in effect at Sports Clubs. As members of the
IHRSA, 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 travel.
All memberships require a one-time initiation fee plus monthly membership
dues. Actual rates vary depending on whether the membership is for a Sports Club
or Spectrum Club and the type of membership selected. Corporate memberships are
also available. Unlike many other 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. While the Company
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<PAGE> 30
occasionally institutes special marketing programs which include the offer of
discounts on initiation fees, the Clubs' current base membership fees for new
memberships are as follows:
<TABLE>
<CAPTION>
HEALTH RACQUET EXECUTIVE
------ ------- ---------
<S> <C> <C> <C>
THE SPORTS CLUB/LA
Initiation Fee (1).......................................... $1,295 N/A $2,500
Monthly Dues................................................ 128 N/A 185
THE SPORTS CLUB/IRVINE
Initiation Fee.............................................. 750 $825 1,475(2)
Monthly Dues................................................ 90 105 140
REEBOK SPORTS CLUB/NY
Initiation Fee.............................................. 1,150 N/A 2,000
Monthly Dues................................................ 165 N/A 285(3)
THE SPORTS CLUB/LAS VEGAS
Initiation Fee.............................................. 400 700 N/A
Monthly Dues................................................ 90 130 N/A
THE SPECTRUM CLUBS
Initiation Fee.............................................. 325 325 300(5)
Monthly Dues................................................ 57(4) 67(4) 135(5)
</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) Executive memberships with a half sized locker are also available for $225
per month.
(4) In addition, Spectrum Club members are charged an annual towel fee of $40.
(5) Only offered at The Spectrum Club/Fullerton.
ACQUISITION AND DEVELOPMENT OF ADDITIONAL CLUBS
The Company is continually reviewing acquisition and development
opportunities and from time to time enters into letters of intent and makes
refundable and nonrefundable deposits in order to secure opportunities during
the review process. The consummation of the such transactions is subject to
numerous conditions, including the Company's investigation of the feasibility of
the proposed transaction and the availability of suitable financing of the
Company's portion of acquisition and development costs.
Acquisition Criteria. The Company has established general criteria for the
acquisition of existing Clubs to be operated under the Sports Club and Spectrum
Club names. Sports Clubs must be at least 80,000 square feet in size and located
in a large metropolitan area. Spectrum Clubs generally must exceed 30,000 square
feet. The Company seeks Clubs which have in place an initiation fee and monthly
dues structure and are located in an area with desirable demographic
characteristics for a Sports Club or a Spectrum Club, as the case may be. The
Company analyzes the number of members a Club may attract based upon a number of
factors including the current membership and the number of potential members
based upon certain demographic criteria. 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.
Performance of Newly Acquired Clubs. Clubs acquired by the Company may vary
in terms of the physical layout, decor, age of equipment, staff training,
marketing programs, membership fees, ancillary services offered, and other
characteristics, and, as a result, may have lower operating income than a
typical Sports Club or Spectrum Club. In order to improve a Club which does not
meet the standard for a Sports Club or a Spectrum Club, as the case may be, the
Company may renovate the Club, upgrade fitness equipment, adopt fitness programs
and exercise protocols, install experienced employees, implement marketing and
training programs, and introduce services and
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<PAGE> 31
product sales intended to enhance ancillary revenues. In conjunction with these
improvements, the Company will implement membership fee programs consistent with
other Clubs operated by the Company. Recently acquired Clubs undergoing such
improvements may perform at lower margins during the period of implementation of
new policies and programs.
Development Criteria. The Company will develop a Club if it believes that,
when built, the Club will satisfy the same criteria utilized to consider
acquisitions of Clubs. The Company believes that, because of the established
reputation of the Company and the prestige associated with the Sports Clubs and
the Spectrum Clubs, developers view the Clubs as valuable components of
multi-use developments.
Sports Club Developments. The Company has signed leases with Millennium to
develop Sports Clubs in Washington, D.C. and San Francisco, California.
Negotiations are underway with Millennium for the development of another Sports
Club in Boston, Massachusetts. The three Clubs will be located in projects
developed by Millennium in prime, metropolitan locations which, like the Reebok
Sports Club/NY, include commercial, retail, entertainment and residential space.
These Clubs will be in the 80,000 to 100,000 square foot size range and will
offer services typically found at the Company's other Sports Club sites. The
Clubs are not expected to open until 2001. The Company believes that such
projects offer ideal locations for Sports Clubs and intends to investigate
entering into additional Sports Club developments with Millennium or other
developers in other major metropolitan areas.
The Company has also signed a lease to develop 89,000 square feet of space
within the Rockefeller Center complex in New York City as a Sports Club. The
Company estimates this Club will open in the third quarter of 1999. The Company
is currently evaluating the acquisition or development of one or more additional
Clubs in New York. However, there can be no assurance that the Company will
enter into such a transaction. The Company's agreements relating to the Reebok
Sports Club/NY prohibit the Company from opening or engaging in pre-sale
activities with respect to a Club larger than 30,000 square feet in size in New
York City or within ten miles of the Reebok Sports Club/NY prior to June 1999.
To the extent the foregoing Club proceeds to pre-sale activities prior to June
1999, the Company would be required to seek a waiver of the foregoing
requirement. There can be no assurance that such a waiver could be obtained.
The Company is negotiating and performing due diligence on the acquisition
of a Club in New York City which is expected to close in April 1998. The Company
would concurrently enter into a lease with the owner of the property on which
the Club is located. If the Club is acquired, the Company would close and
completely renovate such facility to re-open it as a Sports Club. The total cost
to the Company of acquiring and renovating this Club, which is expected to take
approximately 15 months, is currently estimated to be approximately $10.0
million. While the Company is completing its investigation, D. Michael Talla,
Chairman and Chief Executive Officer of the Company, and Rex Licklider, Vice
Chairman of the Company (or an entity controlled by them), intend to make a
non-refundable deposit equal to $1.0 million and enter into an agreement,
assignable to the Company, to acquire such facility. Messrs. Talla and Licklider
have agreed to transfer their rights under such agreements to the Company upon
the payment of $1.0 million. Any such acquisition would be subject to the
approval of the Company's current lenders. There can be no assurance that such
approval will be obtained or that the Company will enter into such transaction.
In March 1998, the Company entered into an agreement to acquire
approximately 3.5 acres of undeveloped land in Houston, Texas, on which the
Company expects to develop an approximately 85,000 square foot Sports Club. The
purchase is scheduled to close no later than June 24, 1998. Millennium has
agreed that in the event that the Company does not otherwise obtain satisfactory
financing for the Houston development, Millennium will acquire and negotiate
with the Company to develop the Club with the Company. In addition, the Company
will have the right, for a period of six months following the closing, to
reacquire the property from Millennium. The Company is considering development
alternatives for this property, including a sale/lease back or another financing
or
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<PAGE> 32
joint venture arrangement. The Company is also considering developing a Sports
Club in La Jolla, California, with Millennium. See "Certain Transactions".
The Company has executed a letter agreement with WPI.KOLL Asia Pacific
Advisors, providing the Company a right of first refusal to develop and operate
Sports Clubs in "Mega Malls" being developed in Japan by a consortium of major
Japanese corporations. However, there has been no activity with respect to these
developments since October 1996.
Spectrum Club Developments. The Company is developing Spectrum Clubs in
Anaheim Hills and Thousand Oaks, California. Each Club would be approximately
55,000 square feet. The Company has executed a lease agreement for the Spectrum
Club/Anaheim Hills and has acquired the real property on which the Spectrum
Club/Thousand Oaks will be built. The Company expects the Spectrum Club/Thousand
Oaks to open in the fourth quarter of 1998 and the Spectrum Club/ Anaheim Hills
to open in the third quarter of 1999. The Company has entered into a lease with
respect to an approximately 43,000 square foot Spectrum Club to be built in
Puente Hills, California. The Company expects that this Club will open in late
1999. In addition, the Company will investigate the development of Spectrum
Clubs in multi-use developments in or adjacent to metropolitan areas where the
potential membership base is significant but will not support a Sports Club.
Performance of Newly Developed Clubs. Based on the Company's historical
experience, a newly developed Club tends to achieve significant increases in
revenues during its first years of operation as it reaches maturity.
Recently-opened Clubs which have not achieved maturity have operated at a loss
or at only a slight profit during this period as a result of fixed expenses
which, together with variable operating expenses, approximate or exceed
membership fees and other revenues. While the Company anticipates that these
types of losses will be incurred in the future as a normal part of the Company's
operations to the extent that it develops additional Clubs, the Company believes
that its income from such Clubs will significantly increase as Clubs reach
maturity.
COMPETITION
Although the sports and fitness industry is still fragmented, the industry
has experienced significant consolidation in recent years and certain of the
Company's competitors are significantly larger and have greater financial and
operating resources than the Company. In addition, a number of individual and
regional operators compete with the Company throughout the Company's existing
and targeted markets. Many of these Clubs attract the same types of members
targeted by Spectrum Clubs and Sports Clubs. The Company also competes with
recreational facilities established by governments and businesses, the YMCA and
YWCA, country clubs and weight-reducing salons, as well as products and services
that can be used in the home. Other entertainment and retail businesses also
compete with the Company for the discretionary income of its target market. As
the general public becomes increasingly aware of the benefits of regular
exercise, it is anticipated that additional sports and fitness businesses will
emerge to compete with established operators like the Company, some of which may
be larger and have greater financial and operating resources than the Company.
However, the Company believes that there will continue to exist a market for its
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" name is generally not protectable under federal or state
trademark laws. The Company is currently seeking protection of its "flying lady"
logo as a stand alone design. The Company has successfully registered "The
Sports Club/LA" and "The Sports Club/Irvine" names in combination with the
"flying lady" logo. The Company has registered "The Sports Club/LA" name and
logo in France, Germany and the United Kingdom and is awaiting final approval in
Australia and Japan. The Company holds a federal trademark for the "Spectrum
Club" name.
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<PAGE> 33
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 Nevada, the states in which the Company
currently operates Clubs. 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 pre-opening sales or the
posting of a bond or proof of financial responsibility, and may impose numerous
limitations on the terms of membership 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
courts. In this regard, the California Civil Code imposes a maximum limit on the
amount 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 medical reasons or upon
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.
EMPLOYEES
At January 31, 1998, the Company had approximately 2,100 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
614 full-time employees. Approximately 227 employees are sales personnel or
supervisory personnel involved in Club operations, and 35 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, and are required to participate in
ongoing training and periodic re-evaluation.
PROPERTIES
The Company owns The Sports Club/Irvine, The Sports Club/LA, The Sports
Club/Las Vegas, and the Spectrum Clubs in Agoura Hills, Thousand Oaks, Canoga
Park and Fountain Valley including all underlying real estate. The Spectrum
Club/Santa Ana and the Spectrum Club/Fullerton building are leased with a
purchase option from Millennium, and the Company has entered into an
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<PAGE> 34
agreement pursuant to which Millennium will, at the option of the Company,
develop a Sports Club in Houston, Texas and lease the Club to the Company (see
"Certain Transactions"). The land underlying the Spectrum Club/Fullerton is
leased from the City of Fullerton. All other structures in which the Clubs are
located are leased from third parties.
The Sports Club/LA property secures a loan with a balance of approximately
$22.3 million and bears interest at a fixed annual rate of 10.63%. The Company
is required to make monthly principal and interest payments of approximately
$262,000. The note matures in April 2003 but, if certain conditions are met, the
Company has the right to 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 $4.9
million note bearing interest at a fixed annual rate of 6.0%. The note requires
quarterly principal payments of $125,000 with a balloon payment of $4.0 million
due on November 1, 1999. All assets of the Spectrum Club/Agoura Hills secure a
$2.5 million note which bears interest at a fixed annual rate of 8.5%. Monthly
principal and interest payments of $20,107 are required through the note's
maturity in April 2024.
The following table provides certain information concerning the Company's
operating Clubs:
<TABLE>
<CAPTION>
YEAR OPENED
("O") OR
APPROXIMATE ACQUIRED OWN OR LEASE
CLUB SQUARE FEET ("A") EXPIRATION DATE RENEWAL OPTION
---- ----------- -------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
The Sports Club/LA(1)................. 100,000 1994 A Own N/A
The Sports Club/Irvine................ 130,000 1994 A Own N/A
Reebok Sports Club/NY(2).............. 140,000 1995 O 4/19/15 Three 14-year options
The Sports Club/Las Vegas............. 136,000 1997 A Own N/A
Spectrum Club/Santa Monica............ 30,000 1991 A 11/14/98 Two 5-year options
Spectrum Club/Agoura Hills............ 30,000 1994 A Own N/A
Spectrum Club/Water Garden............ 19,000 1993 O 6/30/08 5-year option
Spectrum Club/Howard Hughes Center.... 36,000 1994 A 9/14/08 Two 5-year options
Spectrum Club/Manhattan Beach(3)...... 65,000 1987 O 2/28/02 Three 5-year options
Spectrum Club/Valencia................ 57,000 1997 O 7/1/12 Two 5-year options
Spectrum Club/Fullerton(4)............ 121,000 1997 A Building 12/31/17 Two 10-year options
Land 4/30/35 N/A
Spectrum Club/Santa Ana(5)............ 75,000 1997 A 12/31/17 Two 10-year options
Spectrum Club/Canoga Park............. 85,000 1997 A Own N/A
Spectrum Club/Fountain Valley......... 42,000 1997 A Own N/A
</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 "Certain Transactions."
(2) The Company is entitled to certain priority distributions from the
partnership which owns this Club. After payment of such priority
distributions, the Company is entitled to 60% of all additional profits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(3) The Company owns a 46.1% interest in the Spectrum Club/Manhattan Beach.
(4) The Company leases the building and land from different parties. The Company
will use a portion of the proceeds of the Offering to acquire ownership of
the building from Millennium. See "Use of Proceeds."
(5) The facility consists of a 75,000 square foot, two-story health Club. A
52,000 square foot, three-story addition was under construction by the prior
owners. The Company will use a portion of the proceeds of the Offering to
acquire ownership of this property. See "Use of Proceeds." The Company is
evaluating whether to complete construction of this building.
The Company has entered into leases with Millennium relating to Sports
Clubs to be developed in Washington, D.C. and San Francisco, California. Each
lease will require payments commencing upon opening of the Clubs by the Company,
expected in 2001, based upon the landlord's development expenses; has an initial
term of 20 years; and provides the Company with three, fourteen-year renewal
options. The Clubs are expected to be from 80,000 to 100,000 square feet in
size. The Company has entered into a lease with respect to the development of a
Sports Club at the Rockefeller Center in New York City. The lease has a term of
fifteen years and provides the Company with two five-year renewal options. The
lease provides for annual rent in the amount of approximately $3.6 million
during the first five years of the term, approximately $4.0 million during
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<PAGE> 35
the second five years of the term, and $4.5 million during the third five years
of the term. The rent during the option terms will be based upon the fair market
value of the leased premises. The Club is expected to be approximately 89,000
square feet in size.
The Company has entered into a "triple net" lease relating to an
approximately 43,000 square foot Spectrum Club to be built in Puente Hills,
California. This lease has a term of fifteen years and options to extend for a
total of 19 years, provides for initial annual rent of approximately $866,000
per year with an increase of 10% each fifth year thereafter.
Leases for the Clubs are generally long-term "triple net" operating leases,
which require the Company to pay all real estate taxes, insurance and
maintenance expenses, in addition to rent, having an average remaining term of
approximately 26 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 lease with Millennium relating to
the Spectrum Club/Fullerton and the Spectrum Club/Santa Ana has a term of twenty
years and provides for base rent of $1.0 million per year for the first ten
years of the term and $1.2 million per year thereafter. The Company will use a
portion of the proceeds of the Offering to acquire ownership of this property.
See "Use of Proceeds." 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 has devised a plan to implement corrective
measures. Although the cost of compliance with existing and evolving ADA, state
and local statutory provisions cannot be predicted with certainty at this time,
the Company currently anticipates the required improvements will be effected as
part of the Company's routine capital expenditures. While the future impact of
evolving ADA, state and local statutory provisions cannot be predicted, such
expenditures are not expected to have a material adverse impact on the Company.
The Company has agreed to operate The Sports Club/Irvine as a first-class
coed athletic and social Club facility until 1999. For a period of 15 years
thereafter, the property use may not be changed 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 anticipates spending a total of approximately $7.0 million at
The Sports Club/Las Vegas and the four recently acquired Spectrum Clubs to
improve these facilities and equipment and ensure that the Clubs meet the
Company's quality standards. 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 described herein, do not require any substantial
renovation or restoration work at this time.
LEGAL PROCEEDINGS
Mkdg/Rhodes SC Partnership and Sports Club, Inc. v. Agricultural Insurance
Company (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 prede-
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<PAGE> 36
cessors 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
totaling approximately $3.0 million 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. An appraisal hearing
is set for March 1998. Trial is scheduled on April 27, 1998. The Company is
informed that if the appraisal shows that the covered loss exceeds the policy
proceeds as claimed by MKDG, MKDG believes the matter may be settled. The
Company will seek to be indemnified by MKDG for all damages and costs incurred
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, SportsMed entered into an asset purchase agreement
with STI whereby SportsMed purchased STI's assets. SportsMed agreed to make
performance payments to STI in the minimum amount of $100,000 per year. A
dispute subsequently arose between SportsMed and STI, and SportsMed 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 $2.3 million on the first two causes of action, and not less than
$1.8 million on the fifth cause of action. The Company does not believe that it
is liable for any amounts other than performance payments under the contract
plus attorneys fees and interest. Discovery is continuing and the parties are
discussing settlement. The matter has been set for trial on July 22, 1998.
Harvey Scott Schwartz v. LA/Irvine Sports Club, Ltd. and Sports Club, Inc.
of California. (Los Angeles Superior Court). On March 5, 1997, the Company was
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 stage, the Company has not evaluated the scope of damages or the
amount in controversy. The Company has responded to the complaint and discovery
is continuing. 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.
R.W. Management Group, Inc. v. Sequoia Athletic Club & Racquetball World,
et al. (Los Angeles Superior Court). On January 20, 1998, R.W. Management Group
("RWMG") filed an action against various Racquetball World-related entities and
individuals (the "RBW Defendants"), the Spectrum Club Company, Inc. ("SCC"), and
the Company, alleging, among other things, breach of contract, breach of
fiduciary duty and interference with contract. The complaint seeks equitable
relief, unspecified compensatory damages, punitive damages and attorneys' fees.
The contract which RWMG alleges was breached (the "RWMG Contract") relates to
the Racquetball World Club located in Canoga Park, which facility (the "Canoga
Park Club") was acquired by SCC in December 1997. In connection with that
acquisition, SCC acquired the assets thereof and assumed only certain designated
liabilities, none of which related to the RWMG Contract; all other obligations
and liabilities associated with the Canoga Park Club were retained by the
seller. Although neither SCC nor the Company has responded to the complaint,
they believe the allegations against them are without merit, and they intend to
vigorously defend this lawsuit.
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<PAGE> 37
Robert Heller v. HealthFitness America, et al. (Los Angeles Superior
Court). On November 3, 1997, Dr. Robert Heller ("Dr. Heller") filed an action
against SportsMed, SCC Medical Group, Inc., and the Company, alleging breach of
contract in connection with a five-year consulting agreement entered into by
SportsMed's predecessor and Dr. Heller. Dr. Heller seeks to recover $162,000 in
consulting fees ($3,000 per month for the balance of the contract's term) and
royalties generated from diagnostic materials allegedly created by Dr. Heller.
The Company, SportsMed, and SCC Medical Group, Inc. have responded to and denied
the allegations of the complaint and discovery is proceeding. Based upon
preliminary investigation, it is the Company's position that no royalties were
ever generated and Dr. Heller must mitigate damages attributable to unpaid
consulting fees. The defendants will seek mediation and believe an early
settlement is likely.
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.
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<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company, as well
as their respective ages as of March 20, 1998, and positions with the Company,
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
D. Michael Talla........... 51 Chairman of the Board and Chief Executive Officer
Rex A. Licklider........... 55 Vice Chairman of the Board
John M. Gibbons............ 49 President, Chief Operating Officer and Director
Nanette Pattee Francini.... 49 Executive Vice President, Secretary and Director
Mark S. Spino.............. 43 Vice President of Development
Philip J. Swain............ 40 Vice President of Operations
Timothy M. O'Brien......... 46 Chief Financial Officer and Assistant Secretary
Brian J. Collins........... 37 Director
Andrew L. Turner........... 51 Director
Dennison T. Veru........... 37 Director
</TABLE>
D. Michael Talla co-founded the Company in 1977, has served as 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
developed by the Company. Mr. Talla holds a Bachelor of Arts Degree in Business
Administration from the University of Arizona.
Rex A. Licklider joined the Company as an unpaid consultant in 1991, has
served as a director of the Company since February 1994 and was named Vice
Chairman of the Board in May 1994. Effective August 1, 1996, Mr. Licklider
entered into a consulting agreement with the Company pursuant to which he
advises the Company with respect to strategic and financial matters. Prior to
his involvement with the Company, Mr. Licklider founded Com Systems, Inc., a
publicly traded long-distance telecommunications company and served in various
capacities as Chairman, President and Chief Executive Officer from 1975 until
April 1992. 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 hired 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 self-employed 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., a publicly traded
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. 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 co-founded the Company in 1977 and has been
principally responsible for overseeing all marketing activities since 1978. Ms.
Pattee Francini has served as a director since February 1994 and was appointed
Executive Vice President and Secretary in May 1994. Ms. Pattee Francini has been
in the sports and fitness industry for more than 20 years and has developed or
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<PAGE> 39
participated in the development of more than 20 Clubs, including all Clubs
developed by the Company. Ms. Pattee Francini holds a Bachelor of Arts Degree
from the University of Arizona.
Mark S. Spino has served the Company as Director of Development since 1980
and was appointed Vice President in 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 Clubs in the United States, including many of the
Clubs developed 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 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 developed 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 as Chief Financial Officer by the
Company since February 1995. In June 1995, he was appointed Assistant Secretary.
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.,
a publicly traded long-distance telecommunications company located in Westlake
Village, California. Mr. O'Brien has a Bachelor of Business Administration
degree from the University of Wisconsin-Madison and is a Certified Public
Accountant.
Brian J. Collins has been Vice President and Chief Financial Officer of
Millennium Partners Management LLC and its predecessor company, affiliates of
Millennium Entertainment Partners L.P., a real estate developer of mixed use
urban entertainment projects, since December 1996. Since June 1, 1997, he has
been a principal of Millennium Partners Management LLC. From March 1993 to
November 1996, Mr. Collins was Senior Vice President at Carol Management Corp.,
an owner and operator of real estate and hotel properties, and from June 1992 to
February 1993, he was President of BJC Realty Inc., a real estate consulting
firm. Mr. Collins holds a Bachelor of Arts Degree from Colgate University and a
Masters of Science from New York University Graduate School of Business.
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., a publicly traded long-term health care
services provider since its formation in 1989. Mr. Turner was also founder and
previously served as Chief Operating Officer of Horizon Healthcare Corporation,
a publicly traded 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 T. 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 director for Lois USA, Inc. a publicly held
company. Mr. Veru is a graduate of Franklin 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 1998 (Messrs.
Turner, Gibbons and Collins), 1999
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(Ms. Pattee Francini and Mr. Veru) and 2000 (Messrs. Talla and Licklider), 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.
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. 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.
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 (the "Named Executive Officers") for the years ended December 31, 1995,
1996 and 1997, for services rendered. Current salaries of the Company's
executives are described below under "Employment Agreements."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND ----------------------- AWARDS OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION
------------------ ------ --------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
D. Michael Talla........... 1997 $239,250(2) -- -- $ 3,135(3)
Chairman of the Board 1996 218,000(2) -- -- --
and Chief Executive
Officer 1995 205,250(2) -- -- --
Nanette Pattee Francini.... 1997 145,100 $ 10,000 15,000 --
Executive Vice President, 1996 124,175 -- 15,000 --
Secretary and Director 1995 122,200 -- -- --
John M. Gibbons............ 1997 245,883(4) 25,000 -- 2,637(3)
President, Chief 1996 232,800(4) 25,000 225,000(5) 2,256(3)
Operating
Officer and Director 1995 218,933(4) -- 450,000(5) --
Mark S. Spino.............. 1997 134,125 10,000 15,000
Vice President and 1996 116,795 -- 15,000 --
Director of Development 1995 111,855 -- -- --
Philip J. Swain............ 1997 146,031 15,000 15,000 908(3)
Vice President and 1996 131,375 -- 25,000 --
Director of Operations 1995 127,000 -- -- --
Timothy M. O'Brien......... 1997 137,667 10,000 15,000 2,807(3)
Chief Financial Officer 1996 122,175 5,000 20,000 1,791(3)
and Assistant Secretary 1995 100,087 -- 25,000 --
</TABLE>
- ---------------
(1) Includes automobile allowance.
(2) 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. See "Certain Transactions."
(3) Represents contribution of the Company's Common Stock pursuant to the
Company's 401-K Profit Sharing Plan.
(4) Includes an allowance for living expenses paid to Mr. Gibbons under the
terms of his employment agreement.
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<PAGE> 41
(5) 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.
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 $115,000 payable to Ms. Pattee Francini,
subject to upward adjustment at the discretion of the Board of Directors. In
1997, the Compensation Committee of the Board of Directors increased Mr. Talla's
and Ms. Pattee Francini's annual salaries to $225,000 and $147,000,
respectively. The Company may terminate either Employment Agreement without
penalty for cause.
The employment agreements with Mr. Talla and Ms. Pattee Francini 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 (up to
six months' pay for Ms. Pattee Francini and up to twelve months' pay for Mr.
Talla). In addition, the employment agreements provide Mr. Talla and Ms. Pattee
Francini with additional severance benefits upon termination of employment
following 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" includes 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. Pattee
Francini would be $754,000 and $477,000, 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. On May
27, 1997, the Compensation Committee of the Board of Directors
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<PAGE> 42
increased Mr. Gibbons annual base salary to $210,000. 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 term 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 $40,000 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.
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.
Effective April 24, 1996, the Compensation Committee of the Board of
Directors amended the employment agreement with Mr. Gibbons 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 $130,000,
$140,000, and $134,000 respectively.
EMPLOYEE BENEFIT PLANS
1994 Stock Incentive Plan
A total of 1,000,000 shares are reserved for issuance upon exercise of
options granted under the 1994 Stock Incentive Plan (the "Plan"), as adopted on
May 27, 1994. As of March 20, 1998, options to purchase an aggregate of 637,833
shares of Common Stock were outstanding and a weighted-average exercise price of
$3.79 per share. No stock options may be granted under the Plan after May 27,
2004.
The Plan is administered by the Company's Compensation Committee (the
"Administrator"). The Administrator has sole discretion and authority,
consistent with the provisions of the Plan, to select the Eligible Participants
to whom Rights will be granted under the Plan, the number of shares which will
be covered by each Right and the form and terms of agreements to be used to
represent the Rights. All employees, officers and directors of the Company,
other than the members of the Administrator, are eligible to participate in the
Plan.
Options. The Administrator is empowered to determine the exercise price of
Options granted under the Plan, but the exercise price of incentive stock
options must be equal to the fair market value of a share of Common Stock on the
date the option is granted (110% with respect to optionees who own at least 10%
of the outstanding Common Stock) and non-statutory options must have an exercise
price equal to at least 85% of the fair market value of a share of Common Stock
on the date the option is granted. Incentive stock options may only be granted
to employees and directors of the Company, or of any subsidiary or parent
corporation. No incentive stock options may be granted to any optionee which
first become exercisable during any calendar year with respect to shares having
an aggregate fair market value, measured at the time of the grant of such
options, in excess of $100,000. Options granted under the Plan may, in the
discretion of the Administrator, become exercisable in installments, however,
upon any merger, acquisition or other
39
<PAGE> 43
reorganization in which the Company is not the surviving corporation, or upon a
change in control of the Company, all Options will be fully exercisable. All
Options which have not previously been exercised or terminated will expire on
the tenth anniversary of the date of grant.
Options terminate on the ninetieth day following the termination of the
employment or position of the Option holder with the Company. If the Option
holder dies, becomes disabled or retires during the term of the Option, the
Option may be exercised following such date by the Option holder or by the
Option holder's estate or by a person who acquired the right to exercise the
Option by reason of the death or disability of the Option holder for a period of
one year. However, a person who retires from the Company may exercise an
incentive stock option only during the ninety-day period following the date of
retirement or termination of employment. An Option will be exercisable following
termination of employment or services only to the extent it was exercisable on
the date of such termination, but no Option may be exercised after the
expiration of its term.
Options granted under the Plan are not transferable other than by will or
by the laws of descent and distribution, and Options may be exercised, during
the lifetime of the Option holder, only by the Option holder or by the Option
holder's guardian or legal representative.
Payment of the exercise price may be made in cash, or, at the discretion of
the Administrator, in shares of Common Stock of the Company already owned by the
Option holder valued at their fair market value on the date of exercise, or by
way of a promissory note from the optionee. The Plan also provides that as a
condition of delivery of shares purchased under the Plan, the Company may
require the Option holder to deposit with the Company an amount sufficient to
satisfy any withholding tax requirements relating to the delivery of the shares.
Under certain conditions, including the consent of the Administrator, the Option
holder may elect to satisfy his or her withholding obligations with a portion of
the shares otherwise deliverable by the Company.
Purchase Rights. 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 period of thirty days
following the date of grant. Shares purchased upon exercise of a Purchase Right
must be paid for, in the discretion of the Administrator, by cash or cash
equivalent, by delivery of a promissory note, or by transfer to the Company of
shares of the Company's Common Stock which had been held by the Purchase Right
holder for a period of at least six calendar months preceding the date of
surrender and which have a fair market value equal to the purchase price at the
time of the transfer. The agreements relating to Purchase Rights may contain
such other provisions as the Administrator may from time to time determine to be
appropriate, including "vesting" provisions granting to the Company the right to
repurchase the shares subject to a Purchase Right at the initial exercise price
upon the termination of the employment or position of the holder of such shares
prior to the vesting date or dates provided in the agreement. Generally, the
provisions applicable to Options regarding transfer and exercise upon
termination, death, disability or retirement will also apply to Purchase Rights.
Stock Appreciation Rights. Stock Appreciation Rights ("SARs")allow their
holders to benefit from the appreciation in the value of the shares subject to
the SARs, without the necessity of the investment of any funds by the holders.
Under the Plan, the Administrator may grant SARs in combination with Options or
on a stand-alone basis. SARs granted with respect to an Option (the "Related SAR
Option") will grant to the holder the right to elect to receive on exercise of
the SAR, either in cash or in whole shares of Common Stock, an amount equal to
the difference between the fair market value of the shares subject to the
Related SAR Option and the exercise price per share of the Related SAR Option.
SARs granted without reference to a Related SAR Option will grant to the holder
the right to elect to receive, either in cash or in whole shares of Common
Stock, an amount equal to the difference between the fair market value of the
shares subject to the SAR on the date the SAR is exercised and on the close of
business on the date of grant of the SAR. To date, no SARs have been granted
under the Plan.
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<PAGE> 44
SARs granted in tandem with a Related SAR Option are exercisable only to
the extent and under the same terms and conditions as the Related SAR Option. If
a SAR is exercised, the Related SAR Option will be modified to cancel the number
of shares with respect to which the SAR was exercised. Upon the exercise or
termination of the Related SAR Option, the SAR granted in connection with the
Related SAR Option will terminate to the extent of the number of shares as to
which the Related SAR Option was exercised or terminated. SARs granted other
than in tandem with a Related SAR Option will contain exercise terms
substantially similar to those contained in Options.
All SARs are exercisable for (i) Common Stock (a "Stock Election"); (ii) an
amount payable in cash or cash equivalents; or (iii) any combination of the
foregoing (any exercise which includes a cash element is referred to herein as a
"Cash Election"). A Cash Election may only be made by an "officer" or "director'
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended (a "Section 16(b) Person") during the period between the third and
twelfth business days following the Company's release for publication of
quarterly or annual summary statements of sales and earnings. A Cash Election by
a person who is not a Section 16(b) Person and a Stock Election by any person
may be made at any time. Notwithstanding the foregoing, the Administrator may,
in its discretion, place a limit on the amount payable upon exercise of a SAR
agreement granting the SAR. The Plan provides that no SAR or Related SAR Option
is exercisable until the expiration of six months following the date of grant of
the SAR or Related SAR Option, except when the grantee dies, retires or becomes
disabled.
Generally, the provisions applicable to Options regarding transfer and
exercise upon termination, death, disability or retirement will also apply to
SARs.
Stock Compensation Plan. On July 8, 1994, the Company instituted its 1994
Stock Compensation Plan (the "Stock Compensation Plan") for the purpose of
compensating eligible directors by granting them shares of the Company's Common
Stock in lieu of a portion of their annual director's fees. A total of 50,000
shares are reserved for issuance pursuant to the Stock Compensation Plan, 12,000
of which have been issued. The Stock Compensation Plan is administered by the
Board of Directors and provides that members of the Board of Directors who are
neither officers nor employees of the Company or of any subsidiary shall
receive, on November 15 of each year, 1,000 shares of Common Stock. The Common
Stock will be granted only to persons who are directors as of the grant date.
Members of the Administrator are eligible to receive shares of Common Stock
pursuant to the Stock Compensation Plan. The Stock Compensation Plan may be
terminated or amended either by the Board of Directors or by the Board of
Directors and the stockholders, but not more often than once every six months,
other than to comport with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder. Unless the Stock
Compensation Plan is amended, neither the number nor type of securities to be
granted to directors pursuant to the Stock Compensation Plan may be changed.
41
<PAGE> 45
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, 1997.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
NUMBER OPTIONS ANNUAL RATES OF STOCK
OF SHARES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM (1)
OPTIONS IN FISCAL OR BASE EXPIRATION -----------------------
NAME GRANTED (2) YEAR PRICE DATE 5% 10%
---- ----------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nanette Pattee Francini...... 15,000 9.68% $4.375 3/20/2007 $106,896 $170,214
Mark S. Spino................ 15,000 9.68% 4.375 3/20/2007 106,896 170,214
Philip J. Swain.............. 15,000 9.68% 4.375 3/20/2007 106,896 170,214
Timothy M. O'Brien........... 15,000 9.68% 4.375 3/20/2007 106,896 170,214
</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.
(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, 1997. 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>
NUMBER OF UNEXERCISED VALUE OF ALL UNEXERCISED IN-THE-
OPTIONS UNDER THE OPTION PLAN MONEY OPTIONS AT FY-END
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ----------------------------- --------------------------------
<S> <C> <C>
John M. Gibbons....................... 225,000/0 $ 1,406,250/$0
Nanette Pattee Francini............... 5,000/25,000 $ 32,813/$138,750
Mark S. Spino......................... 5,000/25,000 $ 32,813/$138,750
Philip J. Swain....................... 8,334/31,666 $ 54,692/$182,496
Timothy M. O'Brien.................... 23,334/36,666 $110,316/$193,747
</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, 1997, was $9.25, which was the closing price per share on the American
Stock Exchange on such date.
COMPENSATION OF DIRECTORS
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, Collins, 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, $37,026 during 1996, and $48,834 during 1997. Under the 1994 Stock
Compensation Plan an aggregate of 12,000 shares of Common Stock were issued to
non-employee directors through December 31, 1997.
42
<PAGE> 46
COMPENSATION OF COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board ("Committee") administers the
executive compensation for the Company. Mr. Licklider was appointed Chairman on
July 8, 1994, and served continuously until August 1, 1996, when he resigned to
become a paid consultant with the Company. Mr. Turner has been a member of the
Committee since September 13, 1994, and became its Chairman on February 27,
1995. Mr. Veru was appointed to the Committee on February 20, 1996. None of
these individuals has ever been an officer or employee of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation includes provisions which limit
the liability of its directors. As permitted by applicable provisions of the
Delaware General Corporation Law (the "Delaware Law"), directors will not be
liable to the Company for monetary damages arising from a breach of their
fiduciary duty as directors in certain circumstances. This limitation does not
affect liability for any breach of a director's duty to the Company or its
stockholders (i) with respect to approval by the director of any transaction
from which he or she derives an improper personal benefit, (ii) with respect to
acts or omissions involving an absence of good faith, that the director believes
to be contrary to the best interests of the Company or its stockholders, that
involve intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern or inattention that amounts to an abdication of
his or her duty to the Company or its stockholders, or that show a reckless
disregard for duty to the Company or its stockholders in circumstances in which
he or she was, or should have been aware, in the ordinary course of performing
his or her duties, of a risk of serious injury to the Company or its
stockholders, or (iii) based on transactions between the Company and its
directors or another corporation with interrelated directors or on improper
distributions, loans or guarantees under applicable sections of Delaware Law.
This limitation of directors' liability also does not affect the availability of
equitable remedies, such as injunctive relief or rescission.
The Company's Bylaws authorize the Company to indemnify its directors and
officers to the full extent permitted by Delaware Law, including circumstances
in which indemnification is otherwise discretionary under Delaware Law, and the
Company anticipates entering into indemnification agreements (the
"Indemnification Agreements") with its directors providing such indemnity. The
Indemnification Agreements will constitute binding agreements between the
Company and each of the other parties thereto, and thus will prevent the Company
from modifying its indemnification policy in a way that is adverse to any person
who is a party to an Indemnification Agreement.
CERTAIN TRANSACTIONS
The Company possesses a 50.1% interest in the partnership which owns The
Sports Club/LA; Mr. Talla beneficially 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. 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.
As of January 1, 1997, Mr. Talla was either the guarantor of, or the named
debtor with respect to, approximately $245,000 in debts of the Company. The
Company 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. All such debts were paid in full during 1997.
43
<PAGE> 47
In April 1996, the Company extended a loan to Mr. Talla in the amount of
$600,000, secured by 384,000 shares of the Company's Common Stock. The loan was
due and payable on April 3, 1997 and bore interest at 6.8%. In 1997, The
Company's Board of Directors approved the extension of the loan and accrued
interest into a new note in the amount of $641,000 with interest at 5.9%, due on
April 3, 1998, secured by a pledge of 300,000 shares of the Company's stock. Mr.
Talla repaid this loan and accrued interest in September 1997.
Effective August 1, 1996, Mr. Licklider entered into a consulting agreement
with the Company pursuant to which Mr. Licklider received $10,000 per month plus
reimbursement for reasonable and necessary expenses. The agreement had a
one-year term and on August 1, 1997 was extended through July 31, 1998. Under
the terms of the agreement, Mr. Licklider advises the Company with respect to
strategic and financial matters for 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.
Effective January 28, 1997, the Board of Directors approved the use of up
to $3.0 million to repurchase shares of the Company's Common Stock. When the
plan was terminated in February 1998, the Company had repurchased a total of
184,766 shares at prices per share ranging from a low of $3.50 on February 12,
1997, to a high of $6.675 on September 12 1997, with a weighted-average price of
$5.58 per share. On March 27, 1997, the Company purchased from Ms. Pattee
Francini, Executive Vice President and Secretary, and Mr. Philip Swain, Vice
President of Operations, 25,000 shares and 20,000 shares, respectively, at a
price of $4.6875, representing the closing price of the Common Stock on the AMEX
on March 25, 1997. On September 12, 1997, the Company purchased from D. Michael
Talla, Chairman of the Board and Chief Executive Officer, 97,166 shares of
Common Stock at a price of $6.675, representing the average of the closing price
of the Common Stock on the AMEX for the 10 trading days immediately preceding,
and ending on, September 12th. The proceeds of the purchase of Common Stock from
Mr. Talla were used to repay the loan by the Company to Mr. Talla described
above.
Millennium is the second largest shareholder of the Company, with 3,929,863
shares or 27.6% of the outstanding Common Stock. Additionally, Millennium is a
partner with the Company in the Reebok Sports Club/NY as well as the landlord of
the building in which the Reebok Sports Club/NY is located. The Reebok-Sports
Club/NY partnership pays rent to Millennium in the amount of $2.0 million per
year, and the partnership agreement provides for a first priority annual
distribution of $3.0 million to Millennium (adjusted to $2.1 million for
calendar year 1997). In June 1997, Millennium and the Company entered into
leases with respect to the development of two additional Sports Clubs in
Washington, D.C. and San Francisco, California and are negotiating the terms of
a lease for an additional Sports Club in Boston, Massachusetts (See
"Business -- Acquisition and Development of Additional Clubs").
On June 11, 1997, the Company issued to Millennium 2,105,263 shares of
Common Stock in exchange for $10.0 million consisting of $5.0 million in cash
and certain interests of Millennium in the Reebok-Sports Club/NY partnership,
including a 9.9% interest in the partnership and a $2.5 million promissory note
issued by the partnership. The Company also granted to Millennium certain
registration and preemptive rights, which preemptive rights have been waived
with respect to the Offering. In addition, for so long as Millennium maintains
at least a 12% interest in the equity securities of the Company, the Company and
certain of its shareholders have agreed to cause a nominee of Millennium to be
appointed or elected to the Board of Directors of the Company; Brian J. Collins,
an officer of Millennium, is currently a member of the Company's Board of
Directors as Millennium's nominee.
On December 31, 1997, the Company sold an additional 625,000 shares of
Common Stock to Millennium for $5.0 million, which the Company used to fund the
cash portion of the acquisition of four Spectrum Clubs from Racquetball World.
In addition, Millennium acquired properties underlying
44
<PAGE> 48
two of the Clubs for $10.0 million and is leasing these properties to the
Company under a financing lease agreement which is reflected as a capital lease
obligation in the Company's consolidated balance sheet. The lease has a term of
twenty years, and provides for annual rent of $1.0 million for the first ten
years and $1.2 million per year thereafter. At any time during the first three
years of the lease the Company may purchase the leased property from Millennium
for a purchase price (currently estimated to be approximately $10.1 million)
equal to $10.0 million plus all costs incurred by Millennium in connection with
the acquisition of such property, plus a 12% compound return on its total
investment. Millennium has the right to require the Company to acquire its
interest in the property at such price if (i) the Company receives private debt
financing in excess of $95.0 million, (ii) the Company receives public equity
financing in excess of $20.0 million, (iii) a default (as defined in the lease)
occurs, or (iv) a major casualty occurs with respect to either property.
Millennium has waived this right with respect to the Offering.
In September 1997, the Company entered into a non-binding agreement to
purchase undeveloped land from an unaffiliated third party in La Jolla,
California, for approximately $6.4 million, on which the Company is evaluating
the development of a Sports Club. To secure its right to purchase this property,
the Company made a series of deposits aggregating $425,000 through January 12,
1998, $325,000 of which is non-refundable. The right to purchase this property
expires April 12, 1998. In March 1998, the Company entered into an agreement
with Millennium pursuant to which Millennium agreed to pay the Company $425,000
in exchange for an option, exercisable at Millennium's sole discretion, to fund
the purchase price and acquire the La Jolla site, subject to the right of the
Company to reacquire the property as described below. Development of the La
Jolla property is subject to further investigation by the Company of the
feasibility of the project as well as obtaining suitable financing, and there
can be no assurance that the Company (whether independently or together with
Millennium) will develop this project.
In March 1998, the Company entered into an agreement to acquire
approximately 3.5 acres of undeveloped land from an unaffiliated third party in
Houston, Texas, for approximately $3.1 million, on which the Company intends to
develop a Sports Club. Millennium has agreed that in the event the Company does
not otherwise obtain satisfactory financing for the Houston development,
Millennium will acquire and negotiate with the Company to develop the Club with
the Company.
The Company is considering development alternatives for both the La Jolla
and Houston properties, including a sale/lease back or other financing or joint
venture arrangements with Millennium or another party. The Company has the
right, for a period of six (6) months to reacquire each of the La Jolla and
Houston properties from Millennium at a purchase price equal to all costs
incurred by Millennium in connection with the acquisition, development and
ownership of such property, plus a 12% compound return on its total investment,
plus, in the case of the La Jolla property, a fee of $200,000. See
"Business -- Acquisition and Development of Additional Clubs."
D. Michael Talla, Chairman and Chief Executive Officer of the Company, and
Rex Licklider, Vice Chairman of the Company, intend to enter into an agreement
to purchase an existing Club and in connection therewith intend to make a $1.0
million non-refundable deposit. In addition, Messrs. Talla and Licklider will
enter into an agreement pursuant to which they will agree to transfer their
rights under such agreement to the Company for a purchase price equal to $1.0
million. The agreement provides that Messrs. Talla and Licklider may not acquire
the Club or sell any rights thereto without first presenting such offer to the
Company. See "Business -- Acquisition and Development of Additional Clubs."
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
45
<PAGE> 49
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.
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.
46
<PAGE> 50
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information, as of March 25, 1998,
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.
<TABLE>
<CAPTION>
PERCENT OF
OUTSTANDING
NUMBER OF SHARES(9)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
------------------- ------------ -------- --------
<S> <C> <C> <C>
D. Michael Talla(2)(3)...................................... 4,739,905 33.2% 23.4%
The Licklider Living Trust dated May 2, 1986................ 1,271,562 8.9 6.3
Mona Talla(2)(3)............................................ 4,739,905 33.2 23.4
Nanette Pattee Francini(2)(3)............................... 4,739,905 33.2 23.4
Mark S. Spino(2)(3)......................................... 4,739,905 33.2 23.4
Philip J. Swain(2)(3)....................................... 4,739,905 33.2 23.4
The Jared R. Talla Irrevocable Trust dated January 4,
1993(2)(3)................................................ 4,739,905 33.2 23.4
The Brett M. Talla Irrevocable Trust dated January 4,
1993(2)(3)................................................ 4,739,905 33.2 23.4
John M. Gibbons(4).......................................... 266,089 1.8 1.3
Dennison T. Veru............................................ 12,000 *** ***
Timothy M. O'Brien(5)....................................... 41,979 *** ***
Andrew L. Turner............................................ 54,000 *** ***
Brian J. Collins............................................ 1,000 *** ***
Millennium(6)............................................... 3,929,863 27.6 19.4
Townsend Group Investments(7)............................... 734,300 5.2 3.6
All directors and executive officers as a group (10
persons)(8)............................................... 6,386,535 43.9 31.1
</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 3,770,617;
30,953; 114,714; 114,714; 256,107; 227,969 and 173,164 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
4,030,998 shares. Assumes that the Underwriters' over-allotment option is
not exercised and that the persons included in the table do not purchase
shares in the Offering. The Jared R. Talla Irrevocable Trust dated January
4, 1993 and the Brett M. Talla Irrevocable Trust dated January 4, 1993 (the
"Selling Stockholders") have each agreed to sell 50,000 shares of Common
Stock pursuant to the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, each of the Selling Stockholders
will own 64,714 shares, and each of the persons subject to the agreement
will beneficially own 21.7% of the outstanding shares.
(3) Includes 51,667 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 15,000 shares and Mr. Swain holds
options exercisable for 21,667 shares.
(4) Includes 35,500 shares owned by Mr. Gibbons, 5,000 shares owned by Mr.
Gibbons' spouse and 225,000 shares of Common Stock issuable within 60 days
upon the exercise of options granted under the Company's 1994 Stock
Incentive Plan, and 589 shares vested under the Company's 401-K Profit
Sharing Plan.
(5) Includes 41,667 shares of Common Stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive Plan,
and 312 shares vested under the Company's 401-K Profit Sharing Plan.
(6) Includes 1,051,000 shares owned by Millennium Development Partners, L.P.,
625,000 shares owned by Millennium Entertainment Partners L.P., and
2,253,863 shares owned by Millennium Partners LLC.
(7) Townsend Group Investments is a registered investment advisor. Includes
50,500 shares over which Townsend has sole voting and dispositive power and
683,800 shares over which it exercises shared voting and dispositive power.
(8) Includes 318,334 shares of Common Stock issuable within 60 days upon the
exercise of options granted under the Company's 1994 Stock Incentive Plan
and 901 shares vested under the Company's 401-K Profit Sharing Plan.
(9) 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 (the "Exchange Act").
47
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
20,221,312 shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and excluding 637,833 shares issuable upon exercise of
outstanding employee stock options and up to 159,081 shares issuable to the
sellers of the Racquetball World Clubs on December 31, 1998 (See "The Company").
Of these shares, approximately 17,200,691 shares held by existing stockholders
or issued in the Offering will be freely tradeable (unless such shares are held
by an "affiliate" of the Company as such term is defined in the Securities Act
and subject to the agreements described below) without restriction or
registration under the Securities Act. The remaining 3,020,621 shares were
issued and sold by the Company in private transactions ("Restricted Shares") and
are eligible for public sale only if registered under the Securities Act or sold
in accordance with Rule 144 thereunder. 2,395,621 of these shares have been
registered for public sale under the Securities Act. The Company has reserved
997,333 shares of Common Stock for issuance under its 1994 Stock Incentive Plan
and 38,000 shares remain available for issuance to non-employee directors under
its 1994 Stock Compensation Plan. The Company has filed registration statements
under the Securities Act covering shares of Common Stock issuable under the
Company's 1994 Stock Incentive Plan and 1994 Stock Compensation Plan, and Common
Stock issued upon the exercise of stock options generally will be available for
sale in the open market subject to Rule 144 volume limitations applicable to
affiliates.
The directors, executive officers and certain stockholders of the Company
who in the aggregate hold approximately 10,316,398 shares of Common Stock and
options to acquire 385,000 shares of Common Stock have entered into agreements,
subject to certain limited exceptions, not to offer, sell or otherwise dispose
of, directly or indirectly, any shares of Common Stock owned by them for a
period of 90 days from the closing of the Offering without the prior written
consent of Schroder & Co. Inc. (the "Lock-Up Agreements"). Schroder & Co. Inc.
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to the Lock-Up Agreements.
No predictions can be made as to the effect, if any, that market sales of
Common Stock or the availability of Common Stock for sale will have on the
market price prevailing from time to time. Sale of a substantial number of
shares of Common Stock in the public market following the Offering could have an
adverse effect on the market value of the Common Stock.
In general, under Rule 144 as currently in effect, any holder of Restricted
Shares, including an affiliate of the Company, as to which at least one year
elapsed since the later of the date of their acquisition from the Company or an
affiliate, would be entitled within any three-month period to sell a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of Common Stock (approximately 200,000 shares immediately after the completion
of the Offering assuming no exercise of the Underwriters' over-allotment option)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Commission. Sales pursuant to Rule 144 are also subject to
certain other requirements relating to manner of sale, notice and availability
of current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the three months immediately preceding the sale, and
who, together with any previous holder who is not an affiliate of the Company,
has beneficially owned Restricted Shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the limitations
described above. The foregoing summary is not intended to be a complete
description of Rule 144.
48
<PAGE> 52
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of an underwriting agreement with the
Company and the Selling Stockholders (the "Underwriting Agreement"), to purchase
from the Company, and the Company has agreed to sell to the Underwriters, the
number of shares of Common Stock set forth opposite their respective names:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Schroder & Co. Inc..........................................
Prudential Securities Incorporated..........................
Sutro & Co. Incorporated....................................
---------
Total............................................. 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of Common Stock offered hereby, if any such shares
are purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock directly to the public, initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters
propose initially to allow a concession not in excess of $
share to certain dealers; and that the Underwriters and such dealers may
initially allow a concession not in excess of $ share to other dealers.
After the initial offering of the shares of Common Stock, the public offering
price and such concessions may be changed by the Underwriters.
The Company and the Selling Stockholders have granted an option to the
Underwriters, exercisable for 30 days from the date of this Prospectus, to
purchase, pro rata, up to an aggregate of 900,000 additional shares of Common
Stock, of which 800,000 are to be issued and sold by the Company and 100,000 are
to be sold by the Selling Stockholders, at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the Common Stock offered hereby.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company and its executive officers, directors and certain shareholders
have agreed with the Underwriters that, for a period of 90 days following the
Offering, they will not offer, sell, contract to sell, grant an option to
purchase, or otherwise dispose (or announce any offer, sale, grant of any
option, or other distribution) of any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock without the prior
written consent of Schroder & Co. Inc., other than grants of employee stock
options under existing option plans and the issuance of Common Stock upon
exercise of employee options.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the AMEX or otherwise and, if commenced, may be discontinued at any
time.
49
<PAGE> 53
At the request of the Company, up to 600,00 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families, and other
persons having business relationships with the Company. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Kinsella, Boesch, Fujikawa & Towle, LLP, 1901 Avenue of the Stars,
7th Floor, Los Angeles, California. Certain legal matters relating to the
Offering will be passed upon for the Underwriters by Stroock & Stroock & Lavan
LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and 1997, and for each of the years in the three-year period ended December
31, 1997, have been incorporated by reference herein and in the registration
statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements, information
statements and other information with the Securities and Exchange Commission
(the "Commission"). Such reports, proxy statements, information statements and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the following Regional Offices: the Northeast Regional Office, Seven
World Trade Center, Suite 1300, New York, New York 10048, and the Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. They may also be obtained by written request from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such reports and other information
can be inspected at the American Stock Exchange, 36 Trinity Place, New York, New
York 10006. The Commission also maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information
regarding the Company. The address for such site is http://www.sec.gov.
A registration statement on Form S-2, together with all amendments,
exhibits and documents incorporated therein by reference (the "Registration
Statement"), has been filed with the Commission, Washington, D.C., under the
Securities Act, with respect to the Common Stock Offered hereby. This
Prospectus, which forms a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. Statements in this Prospectus as to the contents of exhibits are not
necessarily complete, and each statement is qualified in all respects by
reference to the copies of documents filed or incorporated by reference as
exhibits to the Registration Statement or otherwise filed with the Commission.
Copies of the Registration Statement, including exhibits thereto, may be
inspected without charge at the Commission's offices described above, and copies
of all or any part thereof may be obtained from the Commission upon payment of
certain fees prescribed by the Commission.
50
<PAGE> 54
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents (the "Incorporated Documents") filed with the
Commission by the Company pursuant to the Exchange Act are incorporated by
reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 filed on February 27, 1998.
(b) The Company's Current Report on Form 8-K filed on January 15,
1998.
(c) The Company's Current Report on Form 8-K filed on February 2,
1998.
(d) The description of the Company's securities contained in the
Company's Registration Statement on Form 8-A, declared effective by the
Commission on October 13, 1994.
(e) The Company's Current Report on Form 8-K filed on March 12, 1998.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in any other subsequently filed
document which is also incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the Incorporated Documents, other than exhibits
to such documents (unless such exhibits are specifically incorporated by
reference into such documents). Written or telephone requests for such documents
should be directed to Investor Relations, The Sports Club Company, Inc, 11100
Santa Monica Boulevard, Suite 300, Los Angeles, California 90025, telephone
(310) 479-5200.
51
<PAGE> 55
THE SPORTS CLUB COMPANY, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Income for the Three-Year Period
ended December 31, 1997................................... F-4
Consolidated Statements of Shareholders' Equity for the
Three-Year Period ended December 31, 1997................. F-5
Consolidated Statements of Cash Flows for the Three-Year
Period ended December 31, 1997............................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 56
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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, 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,
1996 and 1997, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 13, 1998, except for note 6,
which is as of February 23, 1998.
F-2
<PAGE> 57
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents, includes $727 escrowed
construction funds in 1996............................. $ 4,146 $ 1,581
Accounts receivable, net of allowance for doubtful
accounts of $57 and $385 in 1996 and 1997,
respectively........................................... 1,376 2,072
Inventories............................................... 395 813
Other current assets...................................... 381 354
Due from affiliates....................................... 1,043 106
------- --------
Total current assets.............................. 7,341 4,926
Property and equipment, net................................. 72,736 106,791
Equity interest in unconsolidated subsidiary................ 642 862
Costs in excess of net assets acquired, less accumulated
amortization of $454 and $822 in 1996 and 1997,
respectively.............................................. 13,552 15,917
Organizational costs and other assets, net.................. 1,426 3,065
------- --------
$95,697 $131,561
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments of notes payable and capitalized
lease obligations...................................... $ 2,470 $ 2,975
Notes payable to bank..................................... -- 5,000
Accounts payable.......................................... 1,431 948
Accrued liabilities....................................... 2,777 7,985
Deferred membership revenues.............................. 7,481 9,936
------- --------
Total current liabilities......................... 14,159 26,844
Notes payable and capitalized lease obligations, less
current installment....................................... 36,027 42,823
Deferred lease obligations.................................. 3,309 2,817
Minority interest........................................... 1,000 600
------- --------
Total liabilities................................. 54,495 73,084
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; 11,358,000 and 14,382,621 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 114 144
Additional paid-in capital................................ 36,935 53,613
Retained earnings......................................... 4,153 5,674
Less Treasury stock, at cost, 163,976 shares.............. -- (954)
------- --------
Total shareholders' equity........................ 41,202 58,477
------- --------
$95,697 $131,561
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 58
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $34,659 $36,918 $61,154
Operating expenses
Direct.................................................... 21,730 22,989 43,517
Selling, general and administrative....................... 5,486 6,052 6,607
Depreciation and amortization............................. 2,775 2,490 3,919
------- ------- -------
Total operating expenses............................. 29,991 31,531 54,043
------- ------- -------
Income from operations............................ 4,668 5,387 7,111
Other income (expense):
Interest.................................................. (2,600) (2,682) (3,206)
Minority interests........................................ (150) (150) (22)
Equity interest in net income of unconsolidated
subsidiaries........................................... 860 631 696
Non-recurring items....................................... -- (300) (2,025)
------- ------- -------
Total other income (expense)......................... (1,890) (2,501) (4,557)
------- ------- -------
Income before income taxes........................ 2,778 2,886 2,554
Provision for income taxes.................................. 1,139 1,183 1,014
------- ------- -------
Net Income........................................ $ 1,639 $ 1,703 $ 1,540
======= ======= =======
Net Income per share:
Basic..................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Diluted................................................... $ 0.14 $ 0.15 $ 0.12
======= ======= =======
Weighted average number of common shares outstanding:
Basic..................................................... 11,353 11,355 12,524
======= ======= =======
Diluted................................................... 11,357 11,360 12,683
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 59
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- PAID-IN RETAINED ----------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
------ ------ ---------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995................. 11,350 $114 $36,898 $ 811 -- --
Net Income............................. -- -- -- 1,639 -- --
Issuance of common stock to outside
directors........................... 5 -- 29 -- -- --
------ ---- ------- ------ --- -------
Balance, December 31, 1995............... 11,355 114 36,927 2,450 -- --
Net Income............................. -- -- -- 1,703 -- --
Issuance of common stock to outside
directors........................... 3 -- 8 -- -- --
------ ---- ------- ------ --- -------
Balance, December 31, 1996............... 11,358 114 36,935 4,153 -- --
Net Income............................. 1,540 -- --
Sale of common stock................... 2,730 27 14,973 -- -- --
Issuance of common stock in connection
with acquisition of The Sports Club/
Las Vegas 291 3 1,672 -- -- --
Treasury stock repurchased............. -- -- -- -- 185 $(1,034)
Reissuance of treasury stock for
employee stock plans................ -- -- -- (19) (21) 80
Issuance of common stock to outside
directors........................... 4 -- 33 -- -- --
------ ---- ------- ------ --- -------
Balance, December 31, 1997............... 14,383 $144 $53,613 $5,674 164 $ (954)
====== ==== ======= ====== === =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 60
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income................................................ $ 1,639 $ 1,703 $ 1,540
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization......................... 2,775 2,490 3,919
Accrued management fees............................... (502) (97) --
Equity interest in net income of unconsolidated
subsidiaries....................................... (860) (631) (696)
Distributions from unconsolidated subsidiaries........ 320 623 469
Stock issued as directors' fees....................... 29 8 33
Loss on sales of Sports Connections................... -- 300 --
Minority interest in Reebok-Sports Club/NY............ -- -- (128)
(Increase) decrease in:
Accounts receivable, net........................... (23) 149 (1,176)
Inventories........................................ 42 105 (395)
Other current assets............................... (106) (12) (2,187)
Increase (decrease) in:
Accounts payable................................... 1,011 (816) (493)
Accrued liabilities................................ (908) 225 2,519
Deferred membership revenues....................... (263) (633) 1,635
Deferred lease obligations......................... 312 211 (492)
------- -------- --------
Net cash provided by operating activities.......... 3,466 3,625 4,548
Cash flows from investing activities:
Capital expenditures...................................... (929) (2,788) (4,899)
Business acquisitions, net of cash acquired............... (1,255) (2,118) (10,778)
Proceeds from sale of Sports Connections.................. -- 3,569 --
Sale (purchase) of other non-operating assets............. (33) 95 --
Treasury stock acquired................................... -- -- (1,034)
------- -------- --------
Net cash used for investing activities............. (2,217) (1,242) (16,711)
Cash flows from financing activities:
(Increase) decrease in due from affiliates................ (2,658) 540 937
Proceeds from sale of common stock........................ -- -- 10,000
Proceeds from notes payable and capitalized lease
obligations............................................. -- 23,371 2,324
Repayments of notes payable and capitalized lease
obligations............................................. (2,058) (23,693) (3,663)
Distributions and redemptions of partnership interests.... (30) -- --
------- -------- --------
Net cash provided by (used for) financing
activities....................................... (4,746) 218 9,598
------- -------- --------
Net increase (decrease) in cash and cash
equivalents (3,497) 2,601 (2,565)
Cash and cash equivalents at beginning of year.............. 5,042 1,545 4,146
------- -------- --------
Cash and cash equivalents at end of year.................... $ 1,545 $ 4,146 $ 1,581
======= ======== ========
Supplemental disclosure of cash flow information Cash paid
during the year for interest.............................. $ 2,585 $ 3,068 $ 3,599
======= ======== ========
Cash paid during the year for income taxes................ $ 1,473 $ 590 $ 306
======= ======== ========
Capital expenditures financed............................. $ -- $ 153 $ 7,223
======= ======== ========
Stock issued in exchange for interest in Reebok-Sports
Club/NY................................................. $ -- $ -- $ 5,000
======= ======== ========
Stock issued as partial consideration for The Sports
Club/Las Vegas.......................................... $ -- $ -- $ 1,675
======= ======== ========
Acquisition of land and building under capital lease...... $ -- $ -- $ 10,000
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 61
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. ORGANIZATION
The Sports Club Company, Inc. (the "Company") operates sports and fitness
Clubs ("Clubs"), primarily under the "Sports Club" and "Spectrum Club" names.
Sports Clubs have been developed as "urban country clubs" offering a full range
of services including numerous fitness and recreation options, diverse
facilities and other amenities. Spectrum Clubs are designed as smaller-scale
Sports Clubs with an extensive but smaller range of services. Both Sports Clubs
and Spectrum Clubs are marketed to affluent, health conscience individuals who
desire a premier Club.
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.
Revenue Recognition
The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time.
Initiation fees and related direct expenses, primarily sales commissions, are
deferred and recognized, on a straight-line basis, over an estimated membership
period of between two and one half and three years. Dues that are received in
advance are recognized on a pro-rata basis over the periods in which services
are to be provided.
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.
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, ranging from five to seven years for
equipment and 31.5 to 40 years for buildings. 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 consisting of architectural and feasibility
expenditures incurred for certain prospective health and fitness projects are
capitalized and included in "Organizational costs and other assets" in the
consolidated balance sheet. 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 in the amount of $53,000 and $1.6 million at December 31,
1996 and 1997 respectively. Amounts charged to operations for discontinued
projects were $56,000 in the year ended December 31, 1997.
F-7
<PAGE> 62
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, 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 undiscounted operating 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 follows the provisions of SFAS No. 121
and 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, 1997.
Equity Interest in Unconsolidated Subsidiary
Equity interest in unconsolidated subsidiary consists of a 46.1% interest
in a Spectrum Club located in Manhattan Beach, California. The Company allocates
profits and losses on a basis defined in the partnership agreement. Summary
financial information of the unconsolidated subsidiary is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1997
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Revenues................................................. $5,634 $6,392
Net income............................................... 1,237 1,517
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1997
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Current assets........................................... $ 522 $ 615
Non-current assets....................................... 2,653 2,769
------ ------
Total assets................................... $3,175 $3,384
====== ======
Current liabilities...................................... $1,444 $1,281
Non-current liabilities.................................. 539 444
------ ------
Total liabilities................................... 1,983 1,725
Partners' capital........................................ 1,192 1,659
------ ------
Total liabilities and partners' capital........ $3,175 $3,384
====== ======
</TABLE>
F-8
<PAGE> 63
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
Income Taxes
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
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which is required to be adopted on December 31, 1997.
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously required fully diluted earnings per share. SFAS No. 128 also
requires dual presentation of basic and diluted earnings per share on the face
of the statement of earnings for entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic earnings
per share computation to the numerator and denominator of the diluted earnings
per share computation. SFAS No. 128 did not have a material impact on the
Company.
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, 1997. 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.
Year 2000
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
completed a year 2000 impact analysis. Financial accounting systems were
recently installed which are year 2000 compliant. The Company is currently
implementing a new membership accounting and information system which will be
year 2000 compliant. The cost of the new system, along with necessary equipment,
is estimated to be $1.2 million and will be capitalized pursuant to the
Company's accounting policies.
F-9
<PAGE> 64
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
3. ACQUISITIONS
SportsMed
On November 30, 1995, the Company acquired 100% of the stock of The
SportsMed Company, Inc. ("SportsMed") formerly known as HealthFitness
Organization of America, Inc. The acquisition was accounted for as a purchase.
Accordingly, the operations of SportsMed are included in the accompanying
statement of income from the date of acquisition.
On July 1, 1997, the Company acquired the assets of SportsTherapy Systems,
Inc. ("STS"), a physical therapy and rehab clinic located in Calabasas,
California for approximately $485,000 in cash plus the assumption of various
liabilities in the amount of $187,000. STS has been merged into the Company's
SportsMed subsidiary. In addition, the Company entered into an employment
agreement with the seller of STS pursuant to which the seller is managing the
operations of SportsMed. The acquisition was accounted for as a purchase.
Accordingly, the operations of STS are included in the Company's statement of
income from the date of acquisition.
Sports Clubs
On December 30, 1996, the Company acquired an additional 10.1% interest in
The Reebok-Sports Club/NY partnership for $2.5 million which resulted in an
increase of the Company's total ownership in the partnership to 50.1%. This
acquisition was accounted for as a purchase and accordingly, the operations of
the Club are included in the Company's consolidated statements of income from
the date of acquisition. Prior to this acquisition, the Company's interest was
recorded under the equity method of accounting. Goodwill of approximately $3.8
million resulted from this transaction.
On June 23, 1997, the Company completed the sale of 2,105,263 shares of its
Common Stock to Millennium Entertainment Partners, L.P., (including affiliated
entities, hereafter referred to as "Millennium"). In exchange for the newly
issued shares, the Company received $5.0 million cash, Millennium's 9.9%
Partnership interest in The Reebok-Sports Club/NY Partnership, a $2.5 million
note due from the Partnership and Millennium's rights to certain accrued
management fees due from the Partnership. This transaction increased the
Company's ownership in the Partnership to 60%. The Company also signed
definitive leases with Millennium to jointly develop Sports Clubs in Washington
D.C. and San Francisco, California on properties currently under development by
Millennium. The Company has also signed a letter of intent to develop a Sports
Club in Boston, Massachusetts on property currently under development by
Millennium.
On August 1, 1997, the Company acquired a Club in Henderson, Nevada which
is now operated as The Sports Club/Las Vegas. The purchase price of
approximately $6.7 million consisted of $5.0 million in cash and 290,358 Shares
of the Company's Common Stock, valued at approximately $1.7 million, in shares
of the Company's Common Stock. The acquisition was accounted for as a purchase.
Accordingly, the operations of The Sports Club/Las Vegas are included in the
Company's statement of income from the date of acquisition.
Spectrum Clubs
On December 31, 1997, the Company acquired four Clubs from Racquetball
World, which are now operated as Spectrum Clubs, for a total purchase price
(including the portion paid by Millennium described below) of approximately
$19.4 million. Millennium acquired properties underlying two of the Clubs for
$10.0 million and is leasing these properties to the Company under a financing
lease agreement which is reflected as capitalized lease obligations in the
Company's
F-10
<PAGE> 65
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
consolidated balance sheet. A cash payment of approximately $6.0 million was
made to the sellers and their creditors and the Company assumed approximately
$2.0 million of liabilities. In addition, up to 159,081 shares of the Company's
Common Stock valued at approximately $1.4 million will be issued to certain of
the selling entities ("Sellers"), subject to reduction if certain liabilities of
the Clubs exceed agreed-upon amounts. In a private placement completed in
December 1997, the Company sold 625,000 shares of its Common Stock to Millennium
for $5.0 million to raise funds to complete this acquisition. The acquisition
was accounted for as a purchase. Accordingly, the operations of these four Clubs
will be included in the Company's statement of operations from the date of
acquisition.
The following pro forma financial data present the Company's unaudited pro
forma statement of income for the years ended December 31, 1996 and 1997, giving
effect to the Reebok-Sports Club/ NY, The Sports Club/Las Vegas and the four
Spectrum Club acquisitions as if these transactions had occurred on January 1,
1996. None of the acquisitions was considered to be significant individually or
in the aggregate under the applicable rules of the Securities and Exchange
Commission. The operation of SportsTherapy Systems, Inc. is not material to the
consolidated statement of income, and accordingly, its impact has been excluded
from the following pro forma presentation. The unaudited pro forma condensed
statements of income 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 income also do not
purport to project the results of operations of the Company for any future
period.
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED DECEMBER
31,
----------------------
1996 1997
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues............................................... $66,695 $72,707
Operating expenses..................................... 60,517 65,944
------- -------
Income from operations............................... 6,178 6,763
Other expenses......................................... 5,501 6,159
------- -------
Income before provision for income taxes............. 677 604
Provision for income taxes............................. 277 273
------- -------
Net income................................... $ 400 $ 331
======= =======
Net income per share:
Basic................................................ $ .03 $ .02
======= =======
Diluted.............................................. $ .03 $ .02
======= =======
Weighted-average number of common shares outstanding:
Basic................................................ 14,535 14,456
======= =======
Diluted.............................................. 14,540 14,615
======= =======
</TABLE>
F-11
<PAGE> 66
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
4. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated depreciation,
which is summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1997
-------- ---------
(AMOUNT IN THOUSANDS)
<S> <C> <C>
Land.................................................. $10,234 $ 18,234
Building and improvements............................. 58,076 82,405
Furniture, fixtures and equipment..................... 9,126 14,095
------- --------
77,436 114,734
Less accumulated depreciation and amortization........ 4,700 7,943
------- --------
Net property and equipment.................. $72,736 $106,791
======= ========
</TABLE>
Equipment under capital leases was $2,056,000 and $7,456,000 and related
accumulated amortization was $1,008,000 and 1,854,000 at December 31, 1996 and
1997, respectively.
Included in buildings and improvements at December 31, 1997, is $10,000,000
of buildings acquired under a capital lease in connection with the acquisition
of four Spectrum Clubs (See Note 3). No amortization was recorded for the year
ending December 31, 1997.
5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
1996 1997
------- -------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
The Sports Club/LA note (a)............................ $23,070 $22,378
The Sports Club/Irvine note (b)........................ 5,375 4,875
Spectrum Club/Agoura Hills note (c).................... 2,550 2,533
Spectrum Clubs Fullerton and Santa Ana lease (d)....... -- 10,000
Equipment financing and capitalized lease obligations
(e).................................................. 4,303 5,602
Other notes payable (f)................................ 3,199 410
------- -------
38,497 45,798
Less current installments.............................. 2,470 2,975
------- -------
$36,027 $42,823
======= =======
</TABLE>
- ---------------
(a) The Sports Club/LA note 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 previous owners of this Club.
The note is secured by land, equipment, building improvements and the
building of The Sports Club/Irvine, bears interest at the rate of 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.
F-12
<PAGE> 67
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
(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 8.5%. Monthly principal and interest payments
of $20,107 are required through the note's maturity in April 2024.
(d) In December 1997, the Company acquired four Spectrum Clubs for a total
purchase price (including the portion paid by Millennium described below) of
approximately $19.4 million. Millennium acquired properties underlying two
of the Clubs for $10.0 million and is leasing these properties to the
Company under a financing lease agreement which is reflected as a capital
lease obligation in the Company's consolidated balance sheet. The lease
requires the Company to make annual payments of $1.0 million through 2007
and annual payments of $1.2 million thereafter through the lease expiration
date on December 31, 2017. At any time during the first three years of the
lease the Company may purchase the leased property from Millennium for a
purchase price (currently estimated to be approximately $10.1 million) equal
to $10.0 million plus all costs incurred by Millennium in connection with
the acquisition of such property, plus a 12% compound return on its total
investment. Millennium has the right to require the Company to acquire its
interest in the property at such price if (i) the Company receives private
debt financing in excess of $95.0 million, (ii) the Company receives public
equity financing in excess of $20.0 million, (iii) a default (as defined in
the lease) occurs, or (iv) a major casualty occurs with respect to either
property. Millennium has agreed to waive this right with respect to the
Offering.
(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
10%.
(f) Other notes payable in 1996 include a $2.5 million note from the
Reebok-Sports Club/NY partnership ("Partnership") payable to Millennium, 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. In 1997, the Company acquired this note
from Millennium (See Note 3) and therefore, this obligation is not reflected
in the Company's consolidated balance sheet at December 31, 1997.
Future minimum annual principal payments at December 31, 1997, are as
follows (in thousands):
<TABLE>
<S> <C>
1998...................................................... $ 2,975
1999...................................................... 7,031
2000...................................................... 2,874
2001...................................................... 2,415
2002...................................................... 1,861
Thereafter................................................ 28,642
-------
$45,798
=======
</TABLE>
6. BANK CREDIT FACILITY
At December 31, 1997, the Company had a $5.0 million bank credit facility.
This facility was fully utilized at that date. On February 23, 1998, the credit
facility was amended and the amount of the facility was increased to $15.0
million. Pursuant to the February amendment, the Company may not borrow
additional funds under the credit facility after June 30, 1998, and will be
required to make
F-13
<PAGE> 68
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
monthly payments of $250,000 beginning July 1, 1998, with all remaining amounts
due and payable on October 30, 1998. In addition, the credit facility is due and
payable in full upon consummation by the Company of any debt or equity offering.
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.
The Company was in compliance with its covenants as of December 31, 1997.
7. 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 twenty-six
years, including renewal options, with the earliest expiration date of November
1998. Future minimum noncancelable operating lease payments as of December 31,
1997 are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1998................................................... $ 8,019
1999................................................... 7,912
2000................................................... 7,672
2001................................................... 7,608
2002................................................... 8,211
Thereafter............................................. 84,127
--------
Total minimum lease payments................... $123,549
========
</TABLE>
Rent expense for facilities and equipment aggregated, $1,805,000,
$1,960,000 and $7,438,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Litigation
On May 22, 1997, the Company announced that it had agreed to pay Century
Entertainment Center, L.P. ("Century") approximately $2.0 million to settle
litigation relating to the Century City Spectrum Club which was closed in July
1995. The settlement relates to a suit filed by Century City Spectrum Club
("CCS"), a subsidiary of the Company, against Century alleging breach of the
lease by the prior landlord. Century had acquired the rights under the lease in
connection with bankruptcy of 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 settlement has been completed with the
final payment made in February 1998. The amount has been reflected as a
non-recurring expense on the Company's 1997 statement of income.
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.
F-14
<PAGE> 69
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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.
8. INCOME PER SHARE
The following is a reconciliation of the basic and diluted EPS computations
for the years 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income used for basic and diluted
income per share......................... $1,639 $1,703 $1,540
====== ====== ======
Shares of Common Stock and Common Stock
equivalents:
Weighted-average shares used in
basic computation................ 11,353 11,355 12,524
Dilutive impact of stock options.... 4 5 159
------ ------ ------
Weighted-average shares used for
dilutive computation............. 11,357 11,360 12,683
====== ====== ======
Income per share:
Basic............................ $ 0.14 $ 0.15 $ 0.12
====== ====== ======
Diluted.......................... $ 0.14 $ 0.15 $ 0.12
====== ====== ======
</TABLE>
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Federal.................................. $ 881 $ 915 $ 776
State.................................... 258 268 238
------ ------ ------
$1,139 $1,183 $1,014
====== ====== ======
</TABLE>
Income tax expense differs from the statutory tax rate as applied to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Expected federal income tax expense...... $ 945 $ 981 $ 868
State income taxes, net of federal
benefit............................... 194 202 146
------ ------ ------
$1,139 $1,183 $1,014
====== ====== ======
</TABLE>
F-15
<PAGE> 70
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
The Company's deferred tax assets and liabilities at December 31, 1996 were
approximately $416,000 and $25,000, respectively, compared with approximately
$680,000 and $2,588,000 at December 31, 1997. The Company's valuation allowance
for deferred taxes was approximately $391,000 and $0 at December 31, 1996 and
1997, 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.
10. 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.
The Company has 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 income and
income per share would have been reduced to the proforma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported.............................. $1,639 $1,703 $1,540
Pro forma................................ 1,474 1,533 1,368
Basic income per share:
As reported.............................. $ .14 $ .15 $ .12
Pro forma................................ $ .13 $ .14 $ .11
</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, 1996 and
1997 respectively: dividend yield of 0%, 0% and 0%; expected volatility of
40.0%, 51.3%, and 62.1% risk-free interest rates of 6.5%, 7.0% and 6.5% and
expected lives of 7.5 years, 7.0 years and 6.0 years.
In May 1994 the Company instituted the 1994 Stock Incentive Plan (the
"Plan"). 1,000,000 shares of Common Stock are reserved under the Plan, which
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
F-16
<PAGE> 71
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
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.
A summary of the status of Company stock options in all its stock-based
plans as of December 31, 1995, 1996 and 1997 and changes during the years then
ended are presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Outstanding at January 1, 1995......................... -- --
Granted................................................ 522,000 $6.76
Canceled............................................... 225,000 9.00
-------
Outstanding at December 31, 1995....................... 297,000 5.06
=======
Options excercisable at December 31, 1995.............. 93,753 5.00
=======
Weighted-average fair value of options granted during
year ended December 31, 1995......................... 2.37
Outstanding at January 1, 1996......................... 297,000 5.06
Granted................................................ 220,500 2.66
Canceled............................................... 25,000 3.18
-------
Outstanding at December 31, 1996....................... 492,500 3.17
=======
Options excercisable at December 31, 1996.............. 185,505 3.28
=======
Weighted-average fair value of options granted during
year ended December 31, 1996......................... 1.75
Outstanding at January 1, 1997......................... 492,500 3.17
Granted................................................ 155,000 5.51
Canceled............................................... 5,000 3.10
-------
Outstanding at December 31, 1997....................... 642,500 3.77
=======
Options excercisable at December 31, 1997.............. 334,512 3.23
=======
Weighted-average fair value of options granted during
year ended December 31, 1997......................... 3.53
</TABLE>
F-17
<PAGE> 72
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
- -------- ----------- ------------ -----------
<S> <C> <C> <C>
$8.3750 27,000 9.84 --
5.3750 68,000 9.50 --
4.3750 60,000 9.22 --
2.7500 58,000 8.83 19,338
2.5625 68,500 8.40 22,841
2.6875 70,000 8.17 23,334
3.0000 225,000 7.58 225,000
5.2500 66,000 7.25 43,999
------- -------
642,500 8.60 334,512
======= =======
</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, 1997, no SAR's had 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, 1997, no purchase rights had 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 12,000 shares
have been issued to outside directors under the plan; 5,000 in 1995, 3,000 in
1996 and 4,000 in 1997.
11. RELATED PARTY TRANSACTIONS
Due from affiliates are summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1996 1997
------- -----
(IN THOUSANDS)
<S> <C> <C>
Note receivable from the Company's CEO, including interest
at 5.3%. Secured by a pledge of 384,000 shares of the
Company's Common Stock. Repaid in September 1997......... $ 624 --
Advances to affiliates made in the normal course of
business, payable on demand........................... 419 $106
------ ----
$1,043 $106
====== ====
</TABLE>
The Company manages the operation of its unconsolidated subsidiary, the
Spectrum Club/ Manhattan Beach, of which it owns a 46.1% interest. The Company
receives a fee of $33,322 per month plus 4.5% of the Club's gross revenues for
managing this Club. The Company also manages
F-18
<PAGE> 73
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995, 1996 AND 1997
the operations of the Reebok Sports Club/NY and receives a fee of approximately
5.87% of the gross monthly collections, as defined. Management fees relating to
the Reebok Sports Club/NY of $490,000 and $779,000 for the years ended December
31, 1995 and 1996 were earned and included in the Company's income statement.
Management fees of $1.1 million relating to Reebok Sports Club/NY were earned
for the year ended December 31, 1997. This amount is eliminated from income and
expense in the presentation of the Company's 1997 consolidated statement of
income.
The Reebok Sports Club/NY pays rent to Millennium in the amount of $2.0
million per year, and the partnership agreement provides for a first priority
annual distribution of $3.0 to Millennium. All such payments are reflected as
rent expense in the consolidated statement of income. The Company has entered
into leases with Millennium to develop Sports Clubs in San Francisco, California
and Washington, D.C., and is currently negotiating with Millennium with respect
to the development of a Sports Club in Boston, Massachusetts.
In June 1997 the Company issued Millennium 2,105,263 shares of its Common
Stock in exchange for $5.0 million cash and certain Millennium interests in the
Reebok Sports Club/NY Partnership (See Note 3). In December 1997, the Company
sold 625,000 shares of its Common Stock to Millennium for $5.0 million of cash.
In December 1997, the Company acquired four Spectrum Clubs for a total
purchase price (including the portion paid by Millennium described below) of
approximately $19.4 million. Millennium acquired the real estate at two of the
Clubs for $10.0 million and is leasing these two properties to the Company under
a financing lease agreement which is reflected as a capital lease obligation in
the Company's consolidated balance sheet. The capital lease requires the Company
to make annual payments of $1.0 million through 2007 and annual payments of $1.2
million thereafter through the lease expiration date on December 31, 2017. At
any time during the first three years of the lease the Company may purchase the
property from Millennium for a purchase price equal to an amount that would
enable Millennium to receive a return of its initial $10.0 million investment,
plus all other amounts advanced or transaction costs incurred plus a twelve
percent compound return on all such investments. Millennium has the right to
require the Company to acquire its interest in the lease and land and building
if (i) the Company receives private debt financing in excess of $95.0 million
(ii) the Company receives public equity financing in excess of $20.0 million
(iii) an event of default (as defined in the lease) occurs, or (iv) a major
casualty occurs with respect to either property.
12. CONCENTRATION OF CREDIT RISK
The Company markets its products principally to customers in Southern
California, New York City and Las Vegas. 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.
13. SUBSEQUENT EVENT
The Company has filed a Registration Statement on Form S-2 with the
Securities and Exchange Commission relating to the proposed offering by the
Company of up to 6,000,000 shares of Common Stock (6,900,000 including the
Underwriters' over-allotment option). Estimated proceeds of such offering are
expected to be used to repay long-term debt and for general corporate purposes.
There can be no assurance the offering will be completed.
F-19
<PAGE> 74
======================================================
NO DEALER, SALESPERSON, OR REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN
AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED
IN THIS PROSPECTUS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY COMMON STOCK IN ANY JURISDICTION IN WHICH SUCH
AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
AN OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT
IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 4
The Company.......................... 9
Use of Proceeds...................... 10
Price Range of Common Stock and
Related Matters.................... 11
Dividend Policy...................... 11
Capitalization....................... 12
Selected Consolidated Financial
Data............................... 13
Management Discussion and Analysis of
Financial Condition and Results of
Operation.......................... 14
Business............................. 21
Management........................... 35
Certain Transactions................. 43
Principal and Selling Stockholders... 47
Shares Eligible for Future Sale...... 48
Underwriting......................... 49
Legal Matters........................ 50
Experts.............................. 50
Available Information................ 50
Incorporation of Certain Documents By
Reference.......................... 51
===========================================
</TABLE>
======================================================
6,000,000 SHARES
[LOGO]
THE SPORTS CLUB
COMPANY, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
SCHRODER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
SUTRO & CO. INCORPORATED
, 1998
======================================================
<PAGE> 75
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses set forth below will be borne as indicated below:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- -----------
<S> <C>
SEC Registration Fee........................................ $ 18,319.50
NASD Registration Fee....................................... 6,710.00
Blue Sky Fees and Expenses (including legal fees)........... 5,000.00
Printing and Engraving Fees................................. 100,000.00
AMEX Fees................................................... 17,500.00
Legal Fees and Expenses..................................... 130,000.00
Accounting Fees and Expenses................................ 75,000.00
Miscellaneous Expenses...................................... 97,470.50
-----------
Total............................................. $450,000.00
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The registrant's Certificate of Incorporation includes provisions which
limit the liability of its directors. As permitted by applicable provisions of
the Delaware General Corporation Law (the "Delaware Law"), directors will not be
liable to the registrant for monetary damages arising from a breach of their
fiduciary duty as directors in certain circumstances. This limitation does not
affect liability for any breach of a director's duty to the registrant or its
shareholders (i) with respect to approval by the director of any transaction
from which he or she derives an improper personal benefit, (ii) with respect to
acts or omissions involving an absence of good faith, that the director believes
to be contrary to the best interests of the registrant or its shareholders, that
involve intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern or inattention that amounts to an abdication of
his or her duty to the registrant or its shareholders, or that show a reckless
disregard for duty to the registrant or its shareholders in circumstances in
which he or she was, or should have been aware, in the ordinary course of
performing his or her duties, of a risk of serious injury to the registrant or
its shareholders, or (iii) based on transactions between the registrant and its
directors or another corporation with interrelated directors or on improper
distributions, loans or guarantees under applicable sections of Delaware Law.
This limitation of directors' liability also does not affect the availability of
equitable remedies, such as injunctive relief or rescission.
The registrant's Bylaws authorize the registrant to indemnify its directors
and officers to the full extent permitted by Delaware Law, including
circumstances in which indemnification is otherwise discretionary under Delaware
Law, and the registrant has entered into indemnification agreements with its
directors providing such indemnity. The indemnification agreements will
constitute binding agreements between the registrant and each of the other
parties thereto, and thus prevent the registrant from modifying its
indemnification policy in a way that is adverse to any person who is a party to
an indemnification agreement.
II-1
<PAGE> 76
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Underwriting Agreement.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Kinsella, Boesch, Fujikawa & Towle, LLP******
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.*
10.11 Promissory Note executed by Agoura Hills/Spectrum Club dated
March 29, 1994 in favor of Hawthorne Savings and Loan
Association.*
10.12 Lease of premises for Reebok Sports Club/NY located at 160
Columbus Avenue, New York, New York 10023 dated June 3,
1992.*
10.13 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.*
10.14 Joint Venture Agreement for Sports Connection -- ES/MB
between El Segundo-TDC, Ltd. and Continental El Segundo
Corporation effective as of January 3, 1986.*
10.15 First Amendment to Joint Venture Agreement for Sports
Connection -- ES/MB dated January 3, 1986.*
10.16 Restated Agreement of Limited Partnership of El Segundo-TDC,
Ltd., as amended.*
10.17 Agreement of Limited Partnership of R-SC/NY, Ltd.*
10.18 Management Agreement effective as of June 3, 1992, between
R-SC/NY, Ltd. and Pontius Realty, Inc.*
10.19 License Agreement between Reebok Fitness Centers, Inc. and
R-SC/NY, Ltd. dated June 3, 1992.*
10.20 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.*
10.21 Form of Membership Agreements for the Sports Clubs, Spectrum
Clubs and Sports Connections.*
10.22 Letter Agreement regarding R-SC/NY dated June 3, 1992.*
10.23 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.*
10.24 Agreement of Limited Partnership of NY-SC, Ltd. dated as of
April 29, 1992, as amended July 1, 1992.*
10.25 Sixth Amended and Restated Agreement of Limited Partnership
of L.A./Irvine Sports Clubs. Ltd., dated June 30, 1992.*
10.26 Memorandum of Agreement between Reebok Fitness Centers, Inc.
and the Company dated as of June 3, 1992.*
10.27 Seventh Amendment and Restated Agreement of Limited
Partnership of L.A./Irvine Sports Club, Ltd., a California
Limited Partnership dated as of October 12, 1994.*
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.28 First Amendment to Seventh Amended and Restated Agreement of
Limited Partnership of L.A./Irvine Sports Club, Ltd., a
California Limited Partnership dated as of October 12,
1994.*
10.29 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.*
10.30 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.*
10.31 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.*
10.32 First Amended and Restated Agreement of Limited Partnership
of Reebok-Sports Club/ NY, Ltd. dated as of October 12,
1994.*
10.33 Letter Agreement by and between Reebok Fitness Centers, Inc.
and the Company dated October 12, 1994.*
10.34 Amendment to First Amended and Restated Agreement of Limited
Partnership of Reebok-Sports Club/NY, Ltd. dated as of
October 12, 1994.*
10.35 Letter Agreement by and between Reebok Fitness Centers, Inc.
and the Company, which became effective on October 20,
1994.*
10.36 License Agreement by and between Reebok Fitness Centers,
Inc. and the Company, dated October 20, 1994.*
10.37 Promissory Note executed by L.A./Irvine Sports Clubs, Ltd.
in favor of MKDG/Rhodes SC Partnership, dated October 20,
1994.**
10.38 Employment Agreement between the Registrant and John M.
Gibbons.**#
10.39 First Amendment to Employment Agreement between Registrant
and D. Michael Talla, dated February 27, 1995. ***#
10.40 Amended and Restated Employment Agreement between Registrant
and John M. Gibbons, dated July 14, 1995. ***#
10.41 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.***
10.42 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.***
10.43 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.***
10.44 Loan Agreement between AT&T Commercial Finance Corporation
and L.A./Irvine Sports Clubs, Ltd. dated March 9, 1996.***
10.45 First Amendment to Loan Agreement between AT&T Commercial
Finance Corporation and L.A./Irvine Sports Clubs, Ltd.,
dated March 12, 1996.***
10.46 401-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.****
10.47 First Amendment to Restated Employment Agreement between
Registrant and John M. Gibbons dated as of April 24,
1996.#****
10.48 Asset Purchase Agreement among 24 Hour Fitness, Inc., The
Sports Connection Holding Company, and Registrant dated as
of November 1, 1996.****
10.49 Management Agreement by and between Registrant and C.I.T.E.
Design Corp. dated as of May 2, 1996.****
10.50 Consulting Agreement by and between Registrant and Rex A.
Licklider dated as of August 1, 1996.#****
</TABLE>
II-3
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.51 Letter Agreement by and between Registrant and WPI.Koll Asia
Pacific Advisors dated as of October 9, 1996.****
10.52 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.****
10.53 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.****
10.54 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.****
10.55 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.****
10.56 Letter Agreement between Millennium Entertainment Partners,
L.P. and the Registrant dated as of March 13, 1997.****
10.57 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.****
10.58 First Amendment to Option Agreement between D. Michael Talla
and TTO Partners dated May 27, 1997.*****
10.59 Consulting Agreement between the Registrant and Rex A.
Licklider. #*****
10.60 First Amendment to Loan Agreement by and among the
Registrant and various of its subsidiaries and Sumitomo Bank
of California dated August 1, 1997.*****
10.61 Second Amendment to Loan Agreement by and among the
Registrant and various of its subsidiaries and Sumitomo Bank
of California dated August 14, 1997.*****
10.62 Settlement Agreement, Agreement for Dismissal and General
Release and Waiver by and between Century Entertainment,
L.P., the Registrant and Century City Spectrum Club, Inc.
dated May 16, 1997.*****
10.63 Modification to the March 13, 1997 letter between Millennium
Entertainment Partners, L.P. and the Registrant dated June
10, 1997.*****
10.64 Asset Purchase Agreement between Green Valley Athletic Club
Limited Partnership and the Registrant dated as of May 1,
1997.*****
10.65 Agreement of Purchase and Sale of Real Property between
Green Valley Investment Company, Inc., and the Registrant
dated as of May 1, 1997.*****
10.66 Agreement for Purchase and Sale of Assets by and among HFA
Services, Inc., SportsTherapy, Inc. and Larry Schwartz made
as of July 1, 1997.*****
10.73 Amended and Restated Loan Agreement by and among the
Registrant and various of its subsidiaries and Sumitomo Bank
of California dated as of February 2, 1998.*****
10.74 Amendment of Lease between Lincoln Metrocenter Partners,
L.P. and Reebok-Sports Club/NY Ltd. as of January 31,
1998.*****
10.75 Letter Agreement between AT&T Commercial Finance Corporation
and L.A./Irvine Sports Clubs, Ltd. dated January 8,
1998.*****
10.76 Athletic Club Lease between Millennium Partners LLC and San
Francisco Sports Club, Inc. dated as of June 22, 1997.*****
10.77 Athletic Club Lease between Millennium Partners LLC and
Washington D.C. Sports Club, Inc. dated as of June 22,
1997.*****
10.78 Escrow Instruction to Chicago Title Insurance Company from
La Salle Fund II and the Registrant dated July 24, 1997
regarding purchase of real estate in Thousand Oaks,
California.*****
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.79 First Amendment to Amended and Restated Loan Agreement by
and among the Registrant and various of its subsidiaries,
Sumitomo Bank of California and Comerica Bank -- California,
dated as of February 23, 1998.*****
10.80 Second Amendment to Amended and Restated Loan Agreement by
and among the Registrant and various of its subsidiaries,
Sumitomo Bank of California and Comerica Bank -- California,
dated as of March 16, 1998.
10.81 Letter Agreement by and between AT&T Capital Corporation and
the LA/Irvine Sports Clubs, Ltd., dated as of March 5, 1998.
10.82 Letter Agreement by and between the Registrant and Millenium
Entertainment Partners, L.P., relating to property in
Houston, Texas, dated March 26, 1998.*******
10.83 Letter Agreement by and between the Registrant and Millenium
Entertainment Partners, L.P., relating to property in La
Jolla, California, dated March 26, 1998.*******
10.84 Standard Offer, Agreement and Escrow Instructions for
Purchase of Real Estate by and between the Registrant and
Riverstone Realty Advisors, LLC, dated March 5, 1998.
10.85 Offer to Purchase, Sale Agreement and Joint Escrow
Instructions, by and between TVE, Inc. and University
Technology Center LP, dated September 2, 1997.
23.1 Consent from KPMG Peat Marwick LLP
23.2 Consent of Kinsella, Boesch, Fujikawa & Towle (See Exhibit
5.1)******
24.1 Power of Attorney (included on Page II-10)******
</TABLE>
- ---------------
# 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 on Form
10-K, filed with the Securities and Exchange Commission on March 29,
1996 (SEC file No. 1-13290).
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K/A, filed with the Securities and Exchange Commission on October
14, 1997 (SEC file No. 1-3290).
***** Incorporated by reference to the Registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on February 27,
1998 (SEC file No. 1-3290).
****** Previously filed.
******* To be filed by Amendment.
ITEM 17. UNDERTAKINGS
1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933,
(ii) To reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the change in volume and
price represent no more than a 20%
II-5
<PAGE> 80
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee' table in the effective Registration
Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(b) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of the securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
Offering.
2. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
3. The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 340A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-6
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this amendment to
registration statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Los Angeles, State of California, on March 30,
1998.
THE SPORTS CLUB COMPANY, INC.
By: /s/ D. MICHAEL TALLA
------------------------------------
D. Michael Talla
Chairman of the Board
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ D. MICHAEL TALLA Chairman of the Board March 30, 1998
- --------------------------------------------- Chief Executive Officer
D. Michael Talla (Principal Executive Officer)
* President, Chief Operating March 30, 1998
- --------------------------------------------- Officer and a Director
John M. Gibbons
* Executive Vice President, March 30, 1998
- --------------------------------------------- Secretary and a Director
Nanette Pattee Francini
* Chief Financial Officer March 30, 1998
- --------------------------------------------- (Principal Financial and
Timothy M. O'Brien Accounting Officer)
* Vice Chairman of the Board March 30, 1998
- ---------------------------------------------
Rex A. Licklider
Director March 30, 1998
- ---------------------------------------------
Andrew L. Turner
* Director March 30, 1998
- ---------------------------------------------
Dennison Veru
* Director March 30, 1998
- ---------------------------------------------
Brian J. Collins
*By: /s/ D. MICHAEL TALLA
- -------------------------------------------
D. Michael Talla
(Attorney in Fact)
</TABLE>
II-7
<PAGE> 82
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
1.1 Underwriting Agreement.
4.1 Specimen Common Stock Certificate.*
5.1 Opinion of Kinsella, Boesch, Fujikawa & Towle, LLP******
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.*
10.11 Promissory Note executed by Agoura Hills/Spectrum Club dated
March 29, 1994 in favor of Hawthorne Savings and Loan
Association.*
10.12 Lease of premises for Reebok Sports Club/NY located at 160
Columbus Avenue, New York, New York 10023 dated June 3,
1992.*
10.13 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.*
10.14 Joint Venture Agreement for Sports Connection -- ES/MB
between El Segundo-TDC, Ltd. and Continental El Segundo
Corporation effective as of January 3, 1986.*
10.15 First Amendment to Joint Venture Agreement for Sports
Connection -- ES/MB dated January 3, 1986.*
10.16 Restated Agreement of Limited Partnership of El Segundo-TDC,
Ltd., as amended.*
10.17 Agreement of Limited Partnership of R-SC/NY, Ltd.*
10.18 Management Agreement effective as of June 3, 1992, between
R-SC/NY, Ltd. and Pontius Realty, Inc.*
10.19 License Agreement between Reebok Fitness Centers, Inc. and
R-SC/NY, Ltd. dated June 3, 1992.*
10.20 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.*
10.21 Form of Membership Agreements for the Sports Clubs, Spectrum
Clubs and Sports Connections.*
10.22 Letter Agreement regarding R-SC/NY dated June 3, 1992.*
10.23 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.*
10.24 Agreement of Limited Partnership of NY-SC, Ltd. dated as of
April 29, 1992, as amended July 1, 1992.*
10.25 Sixth Amended and Restated Agreement of Limited Partnership
of L.A./Irvine Sports Clubs. Ltd., dated June 30, 1992.*
</TABLE>
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.26 Memorandum of Agreement between Reebok Fitness Centers, Inc.
and the Company dated as of June 3, 1992.*
10.27 Seventh Amendment and Restated Agreement of Limited
Partnership of L.A./Irvine Sports Club, Ltd., a California
Limited Partnership dated as of October 12, 1994.*
10.28 First Amendment to Seventh Amended and Restated Agreement of
Limited Partnership of L.A./Irvine Sports Club, Ltd., a
California Limited Partnership dated as of October 12,
1994.*
10.29 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.*
10.30 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.*
10.31 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.*
10.32 First Amended and Restated Agreement of Limited Partnership
of Reebok-Sports Club/ NY, Ltd. dated as of October 12,
1994.*
10.33 Letter Agreement by and between Reebok Fitness Centers, Inc.
and the Company dated October 12, 1994.*
10.34 Amendment to First Amended and Restated Agreement of Limited
Partnership of Reebok-Sports Club/NY, Ltd. dated as of
October 12, 1994.*
10.35 Letter Agreement by and between Reebok Fitness Centers, Inc.
and the Company, which became effective on October 20,
1994.*
10.36 License Agreement by and between Reebok Fitness Centers,
Inc. and the Company, dated October 20, 1994.*
10.37 Promissory Note executed by L.A./Irvine Sports Clubs, Ltd.
in favor of MKDG/Rhodes SC Partnership, dated October 20,
1994.**
10.38 Employment Agreement between the Registrant and John M.
Gibbons.**#
10.39 First Amendment to Employment Agreement between Registrant
and D. Michael Talla, dated February 27, 1995. ***#
10.40 Amended and Restated Employment Agreement between Registrant
and John M. Gibbons, dated July 14, 1995. ***#
10.41 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.***
10.42 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.***
10.43 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.***
10.44 Loan Agreement between AT&T Commercial Finance Corporation
and L.A./Irvine Sports Clubs, Ltd. dated March 9, 1996.***
10.45 First Amendment to Loan Agreement between AT&T Commercial
Finance Corporation and L.A./Irvine Sports Clubs, Ltd.,
dated March 12, 1996.***
10.46 401-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.****
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.47 First Amendment to Restated Employment Agreement between
Registrant and John M. Gibbons dated as of April 24,
1996.#****
10.48 Asset Purchase Agreement among 24 Hour Fitness, Inc., The
Sports Connection Holding Company, and Registrant dated as
of November 1, 1996.****
10.49 Management Agreement by and between Registrant and C.I.T.E.
Design Corp. dated as of May 2, 1996.****
10.50 Consulting Agreement by and between Registrant and Rex A.
Licklider dated as of August 1, 1996.#****
10.51 Letter Agreement by and between Registrant and WPI.Koll Asia
Pacific Advisors dated as of October 9, 1996.****
10.52 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.****
10.53 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.****
10.54 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.****
10.55 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.****
10.56 Letter Agreement between Millennium Entertainment Partners,
L.P. and the Registrant dated as of March 13, 1997.****
10.57 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.****
10.58 First Amendment to Option Agreement between D. Michael Talla
and TTO Partners dated May 27, 1997.*****
10.59 Consulting Agreement between the Registrant and Rex A.
Licklider. #*****
10.60 First Amendment to Loan Agreement by and among the
Registrant and various of its subsidiaries and Sumitomo Bank
of California dated August 1, 1997.*****
10.61 Second Amendment to Loan Agreement by and among the
Registrant and various of its subsidiaries and Sumitomo Bank
of California dated August 14, 1997.*****
10.62 Settlement Agreement, Agreement for Dismissal and General
Release and Waiver by and between Century Entertainment,
L.P., the Registrant and Century City Spectrum Club, Inc.
dated May 16, 1997.*****
10.63 Modification to the March 13, 1997 letter between Millennium
Entertainment Partners, L.P. and the Registrant dated June
10, 1997.*****
10.64 Asset Purchase Agreement between Green Valley Athletic Club
Limited Partnership and the Registrant dated as of May 1,
1997.*****
10.65 Agreement of Purchase and Sale of Real Property between
Green Valley Investment Company, Inc., and the Registrant
dated as of May 1, 1997.*****
10.66 Agreement for Purchase and Sale of Assets by and among HFA
Services, Inc., SportsTherapy, Inc. and Larry Schwartz made
as of July 1, 1997.*****
10.73 Amended and Restated Loan Agreement by and among the
Registrant and various of its subsidiaries and Sumitomo Bank
of California dated as of February 2, 1998.*****
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.74 Amendment of Lease between Lincoln Metrocenter Partners,
L.P. and Reebok-Sports Club/NY Ltd. as of January 31,
1998.*****
10.75 Letter Agreement between AT&T Commercial Finance Corporation
and L.A./Irvine Sports Clubs, Ltd. dated January 8,
1998.*****
10.76 Athletic Club Lease between Millennium Partners LLC and San
Francisco Sports Club, Inc. dated as of June 22, 1997.*****
10.77 Athletic Club Lease between Millennium Partners LLC and
Washington D.C. Sports Club, Inc. dated as of June 22,
1997.*****
10.78 Escrow Instruction to Chicago Title Insurance Company from
La Salle Fund II and the Registrant dated July 24, 1997
regarding purchase of real estate in Thousand Oaks,
California.*****
10.79 First Amendment to Amended and Restated Loan Agreement by
and among the Registrant and various of its subsidiaries,
Sumitomo Bank of California and Comerica Bank -- California,
dated as of February 23, 1998.*****
10.80 Second Amendment to Amended and Restated Loan Agreement by
and among the Registrant and various of its subsidiaries,
Sumitomo Bank of California and Comerica Bank -- California,
dated as of March 16, 1998.
10.81 Letter Agreement by and between AT&T Capital Corporation and
the LA/Irvine Sports Clubs, Ltd., dated as of March 5, 1998.
10.82 Letter Agreement by and between the Registrant and Millenium
Entertainment Partners, L.P., relating to property in
Houston, Texas, dated March 26, 1998.*******
10.83 Letter Agreement by and between the Registrant and Millenium
Entertainment Partners, L.P., relating to property in La
Jolla, California, dated March 26, 1998.*******
10.84 Standard Offer, Agreement and Escrow Instructions for
Purchase of Real Estate by and between the Registrant and
Riverstone Realty Advisors, LLC, dated March 5, 1998.
10.85 Offer to Purchase, Sale Agreement and Joint Escrow
Instructions, by and between TVE, Inc. and University
Technology Center LP, dated September 2, 1997.
23.1 Consent from KPMG Peat Marwick LLP
23.2 Consent of Kinsella, Boesch, Fujikawa & Towle (See Exhibit
5.1)******
24.1 Power of Attorney (included on Page II-10)******
</TABLE>
- ---------------
# 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 on Form
10-K, filed with the Securities and Exchange Commission on March 29,
1996 (SEC file No. 1-13290).
**** Incorporated by reference to the Registrant's Annual Report on Form
10-K/A, filed with the Securities and Exchange Commission on October
14, 1997 (SEC file No. 1-3290).
***** Incorporated by reference to the Registrant's Annual Report on Form
10-K, filed with the Securities and Exchange Commission on February 27,
1998 (SEC file No. 1-3290).
****** Previously filed.
******* To be filed by Amendment.
<PAGE> 1
THE SPORTS CLUB COMPANY, INC.
6,000,000 SHARES OF COMMON STOCK*
UNDERWRITING AGREEMENT
March __, 1998
SCHRODER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
SUTRO & CO. INCORPORATED
as Representatives of the
several Underwriters
c/o Schroder & Co. Inc.
787 Seventh Avenue
5th Floor
New York, New York 10019
Ladies and Gentlemen:
The Sports Club Company, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell to the several Underwriters named in Schedule 1 hereto (the
"Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacity, the "Representatives"), an aggregate of
6,000,000 shares (the "Firm Securities") of the Company's Common Stock, par
value $0.01 per share (the "Common Stock"). The Company and each of the selling
stockholders listed on Schedule 2 hereto (collectively, the "Selling
Stockholders" and each individually, a "Selling Stockholder") have also agreed
to issue and sell pursuant to an option, subject to the terms and conditions
hereof, up to 900,000 additional shares of Common Stock, of which 800,000 shares
are to be issued and sold by the Company and 100,000 shares are to be sold by
the Selling Stockholders. Any and all shares of Common Stock to be issued and
sold pursuant to such option are referred to herein as the "Option Securities,"
and the Firm Securities and any Option Securities are collectively referred to
herein as the "Securities."
The Company and the Selling Stockholders hereby confirm their respective
agreement with the several Underwriters, as set forth below. If you are the only
Underwriters, all references herein to the Representatives shall be deemed to be
the Underwriters.
- -------------
* Plus an option to purchase from the Company and the Selling Stockholders up
to 900,000 shares to cover over-allotments.
1
<PAGE> 2
1. Agreements to Sell and Purchase.
(a) The Company agrees to issue and sell to each of the
Underwriters, and each of the Underwriters, severally and not jointly, agrees to
purchase from the Company, upon the basis of the representations, warranties,
agreements and covenants herein contained and subject to the terms and
conditions herein set forth, and at a purchase price of $______ per share, the
number of Firm Securities set forth opposite the name of such Underwriter in
Schedule 1 hereto. The Company shall deliver, or cause to be delivered, to the
Representatives for the respective accounts of the Underwriters, one or more
certificates in definitive form for the Firm Securities that the several
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date (as hereinafter defined), against payment by or on behalf of the
Underwriters of the purchase price therefor by certified or official bank check
or checks drawn upon or by a New York Clearing House bank and payable in
next-day funds to the order of the Company. Such delivery of and payment for the
Firm Securities shall be made at the offices of Schroder & Co. Inc., 787 Seventh
Avenue, 5th Floor, New York, New York 10019 at 9:30 a.m., New York time, on
____________, 1998, or at such other place, time or date as the Representatives
and the Company may agree upon or as the Representatives may determine pursuant
to Section 8 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date." The Company will make such certificate
or certificates for the Firm Securities available for checking and packaging by
the Representatives at the offices in New York, New York of the Company's
transfer agent or registrar at least 24 hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Securities, the Company and the
Selling Stockholders hereby grant to the several Underwriters an option to
purchase, severally and not jointly, the Option Securities (such Option
Securities, if less than the aggregate amount, to be apportioned first between
the Selling Stockholders on a pro rata basis based on the maximum amount of
Option Securities which the Selling Stockholders are obligated to sell to the
Underwriters pursuant to this Section 1(b) and then from the Company, adjusted
by the Representatives in such manner as they deem advisable to avoid
fractional shares). The purchase price to be paid for any Option Securities
shall be the same price per share as the price per share for the Firm Securities
sold by the Company set forth above in paragraph (a) of this Section 1. The
option granted hereby may be exercised only once as to all or any part of the
Option Securities and must be exercised within thirty days after the date of the
Prospectus. The Underwriters shall not be under any obligation to purchase any
of the Option Securities prior to any exercise of such option. The
Representatives may exercise the option granted hereby by giving notice in
writing or by telephone (confirmed in writing) to the Company setting forth the
aggregate amount of Option Securities as to which the several Underwriters are
then exercising the option and the date and time for delivery of and payment for
such Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
seven business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the Representatives and the
Company may agree upon or as the Representatives may determine pursuant to
Section 8 hereof, is herein called the "Option Closing Date" with respect to
such Option Securities. Upon exercise of the option as provided herein, the
Company and the Selling Stockholders shall become obligated to sell to each of
the several Underwriters, and, subject to the terms and conditions herein set
forth, each of the Underwriters (severally and not jointly) shall become
obligated to
2
<PAGE> 3
purchase from the Company and the Selling Stockholders the same percentage of
the total number of the Option Securities as to which the several Underwriters
are then exercising the option, as such Underwriter is obligated to purchase of
the aggregate number of Firm Securities, as adjusted by the Representatives in
such manner as they deem advisable to avoid fractional Shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 1,
except that reference therein to the Firm Securities an the Firm Closing Date
shall be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
Certificates in negotiable form (endorsed in blank or accompanied
by stock powers in blank, with signatures appropriately guaranteed, and any
funds necessary for the purchase of stock transfer stamps) representing all of
the Securities to be sold by the Selling Stockholders have been placed in
custody under Custody Agreements (each, a "Custody Agreement") with American
Stock Transfer & Trust Company as Custodian (the "Custodian") and each Selling
Stockholder has duly executed and delivered a Power of Attorney (a "Power of
Attorney") appointing D. Michael Talla, John Gibbons and Timothy O'Brien, and
each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute this Agreement and to deliver
this Agreement on behalf of such Selling Stockholder, to authorize the delivery
of the Securities to be sold by such Selling Stockholder hereunder and otherwise
to act on behalf of such Selling Stockholder in connection with the transactions
contemplated by this Agreement and such Custody Agreement. Each Selling
Stockholder agrees that the Securities represented by the certificates held in
custody for such Selling Stockholder under such Custody Agreement are subject to
the interests of the Underwriters hereunder and the arrangements made by such
Selling Stockholder for such custody, as well as the appointment by such Selling
Stockholder of the Attorneys-in-Fact, are, to that extent, irrevocable. Each
Selling Stockholder specifically agrees that its obligations hereunder shall not
be terminated, except as otherwise provided herein, by any act of such Selling
Stockholder, operation of law or otherwise, whether by the death or incapacity
of such Selling Stockholder or by the occurrence of any other event. If any
Selling Stockholder should die or become incapacitated or if any other such
event should occur before the delivery of the Securities hereunder, certificates
representing the Securities held in custody for such Selling Stockholder shall
be delivered pursuant to the terms and conditions of this Agreement and such
Custody Agreement, and the actions taken by the Attorneys-in-Fact pursuant to
such Power of Attorney shall be as valid as if such death, incapacity or other
event had not occurred, whether or not the Custodian or the Attorneys-in-Fact
shall have received notice of such death, incapacity or other event.
(c) It is understood that you, individually and not as the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
2. Representations and Warranties. The Company represents and warrants
to, and agrees with, each of the several Underwriters that:
3
<PAGE> 4
(a) A registration statement on Form S-2 (File No. 333-46973)
with respect to the Securities has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the applicable Rules and Regulations (as defined below) of the Securities and
Exchange Commission (the "Commission") and has been filed with the Commission;
such amendments to such registration statement, and such amended prospectuses
subject to completion, as may have been required prior to the date hereof have
been similarly prepared and filed with the Commission; and the Company will file
such additional amendments to such registration statement, and such amended
prospectuses subject to completion, as may hereafter be required. Copies of such
registration statement and each such amendment, each such related prospectus
subject to completion (collectively, the "Preliminary Prospectuses" and
individually, a "Preliminary Prospectus"), each document incorporated by
reference therein and each exhibit thereto have been delivered to you. For
purposes hereof, "Rules and Regulations" means the rules and regulations adopted
by the Commission under either the Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as applicable.
If the registration statement has been declared effective under the Act
by the Commission, the Company will prepare and promptly file with the
Commission, pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations under the Act or as part of a post-effective amendment to the
registration statement (including a final form of prospectus), the information
omitted from the registration statement pursuant to Rule 430A(a) of the Rules
and Regulations under the Act. If the registration statement has not been
declared effective under the Act by the Commission, the Company will prepare and
promptly file a further amendment to the registration statement, including a
final form of prospectus. The term "Registration Statement" as hereinafter used
in this Agreement shall mean such registration statement, including financial
statements, schedules and exhibits in the form in which it became or becomes
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) of the Rules and Regulations under the Act,
the information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A(b) of the Rules and Regulations under the
Act) and, in the event of any amendment thereto after the effective date of such
registration statement (the "Effective Date"), shall also mean (from and after
the effectiveness of such amendment) such registration statement as so amended,
together with any registration statement filed by the Company pursuant to Rule
462(b) under the Act. The term "Prospectus" as used in this Agreement shall mean
the prospectus relating to the Securities as included in such registration
statement at the time it became or becomes effective, except that if any revised
prospectus shall be provided to the Underwriters by the Company for use in
connection with the offering of the Securities that differs from the Prospectus
on file with the Commission at the time the registration statement became or
becomes effective (whether or not such revised prospectus is required to be
filed with the Commission pursuant to Rule 424(b)(3) of the Rules and
Regulations under the Act), the term "Prospectus" shall refer to such revised
prospectus from and after the time it is first provided to the Underwriters for
such use, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Any reference herein to the
Registration Statement, the Prospectus, any amendment or supplement thereto or
any Preliminary Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein, and any reference herein to the terms
"amend," "amendment" or "supplement" with respect to the Registration Statement
or Prospectus shall be deemed to refer to and include the filing of any document
with the Commission deemed to be incorporated by reference therein.
4
<PAGE> 5
(b) Neither the Commission nor any state regulatory authority has
issued any order preventing or suspending the use of any Preliminary Prospectus,
at the time of filing thereof, or instituted proceedings for that purpose, and
each such Preliminary Prospectus, at the time of filing thereof, has conformed
in all material respects to the requirements of the Act and the Rules and
Regulations and, at the time of filing thereof, has not included any untrue
statement of a material fact or omitted to state any material fact necessary to
make the statements therein not misleading and at the time the Registration
Statement became or becomes effective and at all times subsequent thereto up to
and including the Firm Closing Date (as hereinafter defined) and any Option
Closing Date, and during such longer period as the Prospectus may be required to
be delivered in connection with sales by an Underwriter or a dealer, (i) the
Registration Statement and Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and conformed and will
conform in all material respects to the requirements of the Act and the Rules
and Regulations, and (ii) neither the Registration Statement nor the Prospectus,
nor any amendment or supplement thereto included or will include any untrue
statement of a material fact or omitted or will omit to state any material fact
required to be stated therein or necessary to make the statements therein in
light of the circumstances under which they were made not misleading. The
documents incorporated by reference in the Registration Statement, the
Prospectus, any amendment or supplement thereto or any Preliminary Prospectus,
when they became or become effective under the Act or were or are filed with the
Commission under the Exchange Act conformed or will conform in all material
respects with the requirements of the Act or the Exchange Act, as applicable,
and the Rules and Regulations, and as of the date any such document was or is
filed with the Commission under the Exchange Act such document did not, and on
the Firm Closing Date and on any Option Closing Date will not, omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.
(c) The Company is a Delaware corporation in good standing under
the laws of the State of Delaware. Each of the subsidiaries of the Company (the
"Subsidiaries") has been duly organized and is validly existing in good standing
under the laws of its jurisdiction of organization; and each of its Subsidiaries
is (i) a corporation duly organized, validly existing and in good standing under
the laws of its state of incorporation or (ii) a partnership duly formed,
validly existing and in good standing under the laws of its state of formation,
operating pursuant to a valid and binding partnership agreement, duly and
validly authorized, executed and delivered by the parties thereto and
enforceable in accordance with its terms. The Company and each of its
Subsidiaries is duly licensed, registered or qualified to transact business and
in good standing as a foreign corporation or foreign partnership in all
jurisdictions in which the nature of the activities conducted by it or the
character of the assets owned or leased by it makes such licensing, registration
or qualification necessary, except where the failure to so license, register or
qualify would not have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise (a "Material Adverse
Effect").
(d) The Company and each of its Subsidiaries have full power and
authority (corporate or partnership) to conduct all the activities conducted by
it, to own or lease their respective properties and conduct their respective
5
<PAGE> 6
businesses as described in the Registration Statement and the Prospectus; and
the Company has full power (corporate and other) to enter into this Agreement
and to carry out all the terms and provisions hereof to be carried out by it.
(e) The shares of capital stock owned by the Company which have
been issued by the Company's corporate Subsidiaries have been duly authorized
and validly issued, are fully paid and nonassessable and are owned beneficially
by the Company free and clear of any security interests, liens, encumbrances,
equities or claims. The issued partnership interests of those of the Company's
Subsidiaries which have been organized in partnership form (the "Partnership
Subsidiaries") have been duly authorized and validly issued in accordance with
the terms of the respective partnership agreements of the Partnership
Subsidiaries, and in the case of limited partnership interests, are fully paid
and nonassessable and are owned beneficially by the Company free and clear of
any security interests, liens, encumbrances, equities or claims. Except with
respect to the Subsidiaries, the Company does not own, and at the Firm Closing
Date will not own, directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of (i) the articles of incorporation and the bylaws
of the Company and all amendments thereto and (ii) the organizational documents
of each of the Subsidiaries have been delivered to the Representatives, and no
changes therein will be made without the prior written consent of the
Representatives subsequent to the date hereof and prior to the Firm Closing Date
or, if later, the Option Closing Date. A complete and correct copy of the
certificate of partnership and partnership agreement of each of the Company's
Partnership Subsidiaries and all amendments thereto have been delivered to the
Representatives, and no changes therein will be made without the prior written
consent of the Representatives subsequent to the date hereof and prior to the
Firm Closing Date or, if later, the Option Closing Date.
(f) The Company has an authorized capitalization as set forth in
the Prospectus. All of the issued shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
The Firm Securities have been duly authorized and at the Firm Closing Date,
after payment therefor in accordance herewith, will be validly issued, fully
paid and nonassessable. No holders of outstanding shares of capital stock of the
Company are entitled as such to any preemptive or other rights to subscribe for
any of the Securities, and no holders of securities of the Company are entitled
to have such securities registered under the Registration Statement, except
where such rights have been waived. Except as set forth in the Registration
Statement and the Prospectus, the Company does not have outstanding, and at the
Firm Closing Date and, if later, the Option Closing Date will not have
outstanding, any options to purchase, or any rights or warrants to subscribe
for, or any securities or obligations convertible into, or any contracts or
commitments to issue or sell, any shares of its capital stock or any such
warrants, convertible securities or obligations.
(g) The shares of capital stock of the Company conform to the
description thereof incorporated by reference in the Prospectus.
(h) The consolidated financial statements and schedules included
in the Registration Statement, each Preliminary Prospectus and the Prospectus
present fairly the financial condition of the Company, its Subsidiaries and
their respective predecessors as of the
6
<PAGE> 7
dates thereof and the consolidated results of operations, stockholders'
equity and cash flows of the Company and its predecessors for the periods
covered thereby, all in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the entire period involved,
except as otherwise disclosed therein. No other financial statements or
schedules of the Company, its Subsidiaries or any other entity are required by
the Act or the Rules and Regulations to be included in the Registration
Statement, the Preliminary Prospectus or the Prospectus. KPMG Peat Marwick LLP
("KPMG Peat Marwick" or the "Accountants"), who have reported on such financial
statements and schedules, are independent accountants with respect to the
Company and its Subsidiaries, as required by the Act and the Rules and
Regulations. The statements included in the Registration Statement with respect
to the Accountants pursuant to Rule 509 of Regulation S-K of the Rules and
Regulations are true and correct in all material respects.
(i) KPMG Peat Marwick, who have audited the financial statements
of the Company and its consolidated Subsidiaries and delivered their reports
with respect to the audited consolidated financial statements and schedules
incorporated in the Registration Statement and the Prospectus, are independent
public accountants with respect to the Company and its Subsidiaries, as required
by the Act, the Exchange Act and the related published rules and regulations
thereunder.
(j) The Company and its Subsidiaries maintain a system of
internal accounting control sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorization, (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with GAAP and to maintain accountability
for assets, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(k) The execution and delivery of this Agreement has been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company and is the valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights, to general principles
of equity and, with respect to indemnification, public policy.
(l) No legal or governmental proceedings are pending to which the
Company or any of its Subsidiaries is a party or to which the property of the
Company or any of its Subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described therein
and no such proceedings have been threatened against the Company or any of its
Subsidiaries or with respect to any of their respective properties; and no
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required.
(m) Since the respective dates as of which information is given
in the
7
<PAGE> 8
Registration Statement and the Prospectus, except as otherwise stated therein,
(i) there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, (ii) neither the Company nor any of
its Subsidiaries has incurred, nor will they have incurred any material
liabilities or obligations, direct or contingent, (iii) there have been no
transactions entered into by the Company or any of its Subsidiaries, other than
those in the ordinary course of business, which are material with respect to the
Company and its Subsidiaries considered as one enterprise, and (iv) there has
been no dividend or distribution of any kind declared, paid or made by the
Company on any of its shares of Common Stock.
(n) The issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (i) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required under
state securities or blue sky laws or (ii) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, lease or other agreement or instrument
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries or any of their respective properties are
bound, or the charter documents or by-laws of the Company or any of its
Subsidiaries, or any statute or any judgment, decree, order, rule or regulation
of any court or other governmental authority or any arbitrator applicable to the
Company or any of its Subsidiaries, except for any breach, violation or default
which will not have a Material Adverse Effect.
(o) The Company is not an "investment company" or an "affiliated
person" of, or "promoter" or "principal underwriter" for, an "investment
company," as such terms are defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(p) The Company and each of its Subsidiaries have good and
marketable title to all real properties, and interests in real property,
described in the Prospectus (including the documents incorporated by reference
therein) as owned by each of them, in each case free and clear of all liens,
charges, encumbrances and restrictions except such as are described in the
Registration Statement or such as do not materially adversely affect the value
of such property or interests or interfere with the use made or proposed to be
made of such property or interests by the Company and each of its Subsidiaries;
the Company has obtained satisfactory confirmations, except as is otherwise
described in the Registration Statement, that the Company and each of its
Subsidiaries has the foregoing title to such real property and interests in real
property; and any real property and buildings held under lease by the Company or
any of its Subsidiaries, as the case may be, under valid, binding and
enforceable leases conforming to any applicable description thereof set forth in
or the documents incorporated by reference into the Registration Statement and
the Prospectus, with such exceptions as do not interfere with the use made and
proposed to be made of such property and buildings by the Company, its
Subsidiaries or any third party.
(q) No statement, representation, warranty or covenant made by
the Company
8
<PAGE> 9
in this Agreement or made in any certificate or document required by this
Agreement to be delivered to the Representatives was or will be, when made,
inaccurate, untrue or incorrect in any material respect.
(r) Neither the Company nor any of its directors, officers or
controlling persons has taken, directly or indirectly, any action intended, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities.
(s) The Company has been advised by the American Stock Exchange
(the "AMEX") that the Securities will be listed for trading on the AMEX upon
official notice of issuance, and the Company knows of no reason or set of facts
which would adversely affect such approval.
(t) Neither the Company nor any of its Subsidiaries is involved
in any material labor dispute nor, to the best knowledge of the Company, is any
such dispute threatened.
(u) Neither the Company nor any of its Subsidiaries nor, to the
Company's best knowledge, any employee or agent of the Company or any Subsidiary
has made any payment of funds of the Company or any Subsidiary of the Company or
received or retained any funds in violation of any law, rule or regulation or of
a character required to be disclosed in the Prospectus.
(v) Any certificate signed by any officer of the Company and
delivered to the Representatives or to counsel for the Underwriters in
connection with the transactions contemplated by this Agreement shall be deemed
a representation and warranty by the Company to each Underwriter as to the
matters covered thereby
(w) The Company and each of its Subsidiaries has and will have at
the Firm Closing Date and the Option Closing Date (if any) all governmental
licenses, permits, consents, orders, approvals and other authorizations
(collectively, "Licenses") necessary to carry on their business and own their
properties as contemplated in the Prospectus, except where the failure to so
obtain such Licenses will not have a Material Adverse Effect. The Company and
each of its Subsidiaries has, and at the Firm Closing Date and the Option
Closing Date (if any) will have, complied in all material respects with all
laws, regulations and orders applicable to them or their business and
properties, except where the failure to so comply will not have a Material
Adverse Effect. Neither the Company nor any of its Subsidiaries are, at the Firm
Closing Date and the Option Closing Date (if any), in default (nor has any event
occurred which, with notice or lapse of time or both, would constitute a
default) in the due performance and observation of any term, covenant or
condition of any indenture, mortgage, deed of trust, voting trust agreement,
loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument (collectively, a
"contract or other agreement") to which they are a party or by which any of
their properties are bound or affected, except for any default which would not
have a Material Adverse Effect. To the best knowledge of the Company, no other
party under any such contract or other agreement is in default in any material
respect thereunder.
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<PAGE> 10
There are no governmental proceedings or actions pending or threatened for the
purpose of suspending, modifying or revoking any License held by the Company or
any of it Subsidiaries. The Company is not in violation of any provision of its
articles of incorporation or bylaws. None of the Subsidiaries are in violation
of their organizational documents.
(x) There is no document or contract of a character required to
be described in the Registration Statement or the Prospectus or to be filed as
an exhibit to the Registration Statement which is not described or filed as
required. All contracts to which the Company or any of its Subsidiaries is a
party which are listed in Item 16 of the Registration Statement, have been duly
authorized, executed and delivered by the Company, constitute valid and binding
agreements of the Company and are enforceable against the Company in accordance
with the terms thereof.
(y) The Company and each of its Subsidiaries own, or are licensed
or otherwise have the full right to use all material trademarks and trade names
which are used in or necessary for the conduct of their business as may be
described in the Prospectus. To the Company's best knowledge, no claims have
been asserted by any person to the use of any such trademarks or trade names or
challenging or questioning the validity or effectiveness of any such trademark
or trade name. The use, in connection with the business and operations of the
Company or any of its Subsidiaries of such trademarks and trade names does not,
to the Company's knowledge, infringe on the rights of any person.
(z) The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility or self-insured against such
losses and risks and in such amounts as are prudent and customary in the
business in which they are engaged. Neither the Company nor any of its
Subsidiaries has been refused any insurance coverage sought or applied for; and
none of the Company or any of its Subsidiaries has any reason to believe that it
will not be able to renew their existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers or continue
to be self-insured as may be necessary to continue its business at a cost that
would not have a Material Adverse Effect.
(aa) The business, operations and facilities of the Company and
each of its Subsidiaries have been conducted in compliance with all applicable
laws, ordinances, rules, regulations, Licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and health, or
pollution, or protection of health or the environment (including, without
limitation, those relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants or hazardous or toxic substances, materials
or wastes into ambient air, surface water, groundwater or land, or relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of chemical substances, pollutants, contaminants or
hazardous or toxic substances, materials or wastes, whether solid, gaseous or
liquid in nature) of any governmental department, commission, board, bureau,
agency or instrumentality of the United States, any state or political
subdivision thereof, or any foreign jurisdiction, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and orders
relating thereto, except where such failure to comply would not, alone or in the
aggregate, have a Material Adverse Effect; and neither the Company nor any of
its Subsidiaries has received any notice from any governmental instrumentality
or any third party
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<PAGE> 11
alleging any such violation thereof or liability thereunder (including, without
limitation, liability for costs of investigating or remediating sites containing
hazardous substances and/or damages to natural resources).
(bb) The Company and each of its Subsidiaries has filed all
foreign, federal, state and local tax returns that are required to be filed or
has requested extensions thereof and has paid all taxes required to be paid by
them or reserved adequately therefor and any other assessment, fine or penalty
levied against them, to the extent that any of the foregoing is due and payable.
(cc) Each officer and director of the Company has delivered to
Schroder & Co. Inc. an agreement in the form set forth as Exhibit A hereto to
the effect that he or she will not, for a period of 90 days after the date
hereof, without the prior written consent of Schroder & Co. Inc., offer to sell,
sell, contract to sell, grant any option to purchase or otherwise dispose (or
announce any offer, sale, grant of any option to purchase or other disposition)
of any shares of Common Stock or securities convertible into, or exchangeable or
exercisable for, shares of Common Stock.
(dd) The Company and its officers and directors have not
distributed and will not distribute the Registration Statement, any Preliminary
Prospectus, the Prospectus or any other offering material in connection with the
offering and sale of the Securities. The Company and its officers and directors
have not taken, directly or indirectly, any action designed, or which might
reasonably be expected, to cause or result in, under the Act or otherwise, or
which has caused or resulted in, stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Securities.
3. Representations and Warranties of the Selling Stockholders.
Each of the Selling Stockholders, jointly and severally, represents, warrants
and covenants to each Underwriter that:
(a) Such Selling Stockholder has full power and authority
to enter into this Agreement and to carry out all the terms and provisions
hereof to be carried out by it. All authorizations and consents necessary for
the execution and delivery by such Selling Stockholder of this Agreement have
been given. This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Stockholder and constitutes a valid and binding
agreement of such Selling Stockholder and is enforceable against such Selling
Stockholder in accordance with the terms hereof, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to or affecting creditors' rights generally or by
general principles of equity relating to the availability of remedies and except
as rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws.
(b) Such Selling Stockholder has full power and authority
to enter into the Power of Attorney in the form heretofore furnished to the
Underwriters and the Custody Agreement in the form heretofore furnished to the
Underwriters and to carry out all the terms and provisions thereof to be carried
out by it. All authorizations and consents necessary for the
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<PAGE> 12
execution and delivery by such Selling Stockholder and of the Power of Attorney
and the Custody Agreement have been given. Each of the Power of Attorney and the
Custody Agreement has been duly authorized, executed and delivered by such
Selling Stockholder and is enforceable against such Selling Stockholder in
accordance with the terms thereof, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors' rights generally or by general principles of
equity relating to the availability of remedies.
(c) Such Selling Stockholder now has, and at the time of
delivery thereof hereunder will have, (i) good and marketable title to the
Option Securities to be sold by such Selling Stockholder hereunder, free and
clear of any security interests, liens, encumbrances, equities or claims, and
(ii) full legal right and power, and all authorizations and approvals required
by law, to sell, transfer and deliver the Option Securities to the Underwriters
hereunder and to make the representations, warranties and agreements made by
such Selling Stockholder herein; and upon delivery of the Option Securities
hereunder, and assuming that each of the Underwriters acquires such Option
Securities in good faith without notice of any adverse claim (within the meaning
of the Uniform Commercial Code), the Underwriters will receive good and
marketable title to the Option Securities purchased by it from such Selling
Stockholder, free and clear of any security interests, liens, encumbrances,
equities or claims.
(d) On the Closing Date all stock transfer or other taxes
(other than income taxes) which are required to be paid in connection with the
sale and transfer of the Option Securities to be sold by such Selling
Stockholder to the several Underwriters hereunder will have been fully paid or
provided for by such Selling Stockholder and all laws imposing such taxes will
have been fully complied with.
(e) None of the execution, delivery or performance of this
Agreement, the Power of Attorney or the Custody Agreement and the consummation
of the transactions contemplated herein or therein by such Selling Stockholder
conflicts or will conflict with, or results or will result in any breach or
violation of any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any security interests, liens,
encumbrances, equities or claims upon, any property or assets of such Selling
Stockholder pursuant to, (i) the terms of any contract or other agreement to
which such Selling Stockholder is a party or by which it is bound or to which
any of its properties is subject, which conflict, breach, violation or default
would adversely affect such Selling Stockholder's ability to perform its
obligations hereunder; (ii) any statute, rule or regulation of any governmental
authority having jurisdiction over such Selling Stockholder or any of its
activities or properties; or (iii) the terms of any judgment, decree or order of
any arbitration or governmental authority having such jurisdiction.
(f) No consent, approval, authorization or order of, or
any filing or declaration with, any governmental authority is required for the
consummation by such Selling Stockholder of the transactions on its part
contemplated herein, except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or Blue
Sky laws or the bylaws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Option Securities to be sold by such
Selling
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<PAGE> 13
Stockholder.
(g) The sale of the Option Securities proposed to be sold
by such Selling Stockholder is not prompted by such Selling Stockholder's
knowledge of any material adverse information concerning the Company or any of
its Subsidiaries which is not set forth or described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus).
(h) On the date that any Preliminary Prospectus was filed
with the Commission, the date the Prospectus is first filed with the Commission
pursuant to Rule 424(b) (if required), at all times subsequent to and including
the Closing Date and, if later, the Option Closing Date and when any
post-effective amendment to the Registration Statement becomes effective or any
amendment or supplement to the Prospectus is filed with the Commission, all
information with respect to such Selling Stockholder included in the
Registration Statement, each Preliminary Prospectus and the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment or supplement thereto), did or will comply with all applicable
provisions of the Act and the Rules and Regulations and did or will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no information
regarding such Selling Stockholder included in the Registration Statement or any
such amendment did or will contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading. At the Effective Date, the
date the Prospectus or any amendment or supplement to the Prospectus is filed
with the Commission and at the Closing Date and, if later, the Option Closing
Date, the information regarding such Selling Stockholder included in the
Prospectus did not or will not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(i) Such Selling Stockholder has no reason to believe that
the representations and warranties of the Company contained in Section 2 are not
true and correct in all material respects.
(j) Such Selling Stockholder has not distributed and will
not distribute the Registration Statement, any Preliminary Prospectus, the
Prospectus or any other offering material in connection with the offering and
sale of the Option Securities. Such Selling Stockholder has not taken, directly
or indirectly, any action designed, or which might reasonably be expected, to
cause or result in, under the Act or otherwise, or which has caused or resulted
in, stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Option Securities.
(k) Such Selling Stockholder does not have, nor has
obtained waiver prior to the date hereof, any preemptive right, co-sale right or
right of first refusal or other similar right to purchase any of the Securities
that are to be sold by the Company or any of the Selling Stockholders to the
Underwriters pursuant to this Agreement; and such Selling Stockholder does not
own any warrants, options or similar rights to acquire, and does not have any
right or
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<PAGE> 14
arrangement to acquire, any capital stock, rights, warrants, options, or other
securities from the Company, other than those described in the Registration
Statement and the Prospectus.
4. Representations and Warranties of the Underwriters. Upon your
authorization of the release of the Firm Securities, the several Underwriters
propose to offer the Firm Securities for sale to the public upon the terms set
forth in the Prospectus.
5. Agreements. The Company (as to Sections 5(a) - (i)) and each Selling
Stockholder (as to Section 5(h)), jointly and severally, covenant and agree with
each of the Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; it will notify the Representatives,
promptly after it shall receive notice thereof, of the time when the
Registration Statement or any subsequent amendment to the Registration Statement
has become effective or any supplement to the Prospectus has been filed; if the
Company omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a), the Company will
provide evidence satisfactory to the Representatives that the Prospectus
contains such information and has been filed, within the time period prescribed,
with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the
Rules and Regulations under the Act or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if for any reason the filing of the final form of
Prospectus is required under Rule 424(b)(3) of the Rules and Regulations under
the Act, it will provide evidence satisfactory to the Representatives that the
Prospectus contains such information and has been filed with the Commission
within the time period prescribed; it will notify the Representatives promptly
of any request by the Commission for the amending or supplementing of the
Registration Statement or the Prospectus or for additional information; promptly
upon the Representatives' request, it will prepare and file with the Commission
any amendments or supplements to the Registration Statement or Prospectus which,
in the opinion of counsel for the several Underwriters ("Underwriters'
Counsel"), may be necessary or advisable so as to comply with all applicable
laws and regulations (including, without limitation, Section 11 under the Act
and Rule 10b-5 under the Exchange Act) in connection with the distribution of
the Securities by the Underwriters; it will promptly prepare and file with the
Commission, and promptly notify the Representatives of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Securities is required to be delivered under the Act,
any event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Securities as then in effect would include an untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading; in case any Underwriter is required so as to comply with
all applicable laws and regulations (including, without limitation, Section 11
under the Act and Rule 10b-5 under the Exchange Act) to deliver a prospectus
nine months or more after the Effective Date in connection with the sale of the
Securities, it will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and such
prospectus or prospectuses as may be necessary to permit
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<PAGE> 15
compliance with the requirements of Section 10(a)(3) of the Act; and it will
file no amendment or supplement to the Registration Statement or Prospectus
(other than any document required to be filed under the Exchange Act that upon
filing is deemed incorporated therein by reference) which shall not previously
have been submitted to the Representatives a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing or
which is not in compliance with the Act and the Rules and Regulations under the
Act. The Company will furnish to the Representatives at or prior to the filing
thereof a copy of any document that upon filing is deemed to be incorporated by
reference in the Registration Statement or Prospectus.
(b) The Company will advise the Representatives, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will arrange for the qualification of the Securities for
offering and sale under the securities or blue sky laws of such jurisdictions as
the Representatives may designate and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Securities; provided, however, that in connection therewith the Company shall
not be required to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction.
(d) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act, the
Exchange Act or the respective rules or regulations of the Commission
thereunder, the Company will promptly notify the Representatives thereof and,
subject to Section 4(a) hereof, will prepare and file with the Commission, at
the Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the Representatives
and to counsel for the Underwriters, upon request, a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto), (ii) to each
Underwriter, a conformed copy of such registration statement and each amendment
thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request.
(f) The Company, as soon as practicable, will make generally available to
its security holders and to the Representatives a consolidated earnings
statement of the Company and its Subsidiaries (which need not be audited) that
satisfies the provisions of Section 11(a) of the Act
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<PAGE> 16
and Rule 158 thereunder.
(g) The Securities will be listed on the AMEX, subject to notice of
issuance.
(h) The Company and its executive officers and directors and each
Selling Stockholder will not, directly or indirectly, offer, sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for, or any rights to purchase or acquire, Common
Stock for a period of 90 days after the date hereof without the prior written
consent of Schroder & Co. Inc.
(i) The Company intends to use the net proceeds from the sale of the
Securities sold by it hereunder as set forth under "Use of Proceeds" in the
Prospectus.
6. Expenses. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of all documents with respect to the
transactions, including any costs of printing the registration statement
originally filed with respect to the Securities and any amendment thereto and
the Prospectus and any amendment or supplement thereto, this Agreement and any
blue sky memoranda, the Custody Agreements and the Powers of Attorney (ii) all
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel,
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Securities, including transfer agent's and registrar's fees, (v)
the qualification of the Securities under state securities and blue sky laws,
including filing fees and fees and disbursements of counsel for the Underwriters
relating thereto, (vi) the filing fees of the Commission relating to the
Securities, (vii) the listing of the Securities on the AMEX, (viii) expenses of
Company personnel in connection with their attendance at meetings with
prospective investors in the Securities, and (ix) fees and expenses incurred in
connection with the review by the National Association of Securities Dealers,
Inc. ("NASD") of certain of the matters set forth in this Agreement, including
fees and disbursements of counsel for the Underwriters relating thereto. If the
sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 6 hereof
is not satisfied, because this Agreement is terminated pursuant to Section 11
hereof or because of any failure, refusal or inability on the part of the
Company to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities. The Company shall not in any event be liable to any
of the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
7. Conditions to the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy in all
material respects of the representations and warranties of the Company contained
herein as of the date hereof and as of the Firm Closing Date as if made
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<PAGE> 17
on and as of the Firm Closing Date, to the accuracy in all material respects of
the certificates of the Company's officers delivered pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) The Prospectus shall have been filed with the
Commission in the manner and within the time period required by Rule 424(b)
under the Act; no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto and no order directed at any
document incorporated by reference in the Registration Statement or the
Prospectus or any amendment or supplement thereto shall have been issued and no
proceedings for that purpose shall have been instituted or threatened or, to the
knowledge of the Company or the Representatives, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
(b) The Representatives shall have received an opinion,
dated the Firm Closing Date, of Kinsella, Boesch, Fujikawa and Towle LLP, to the
effect that:
(i) Each of the Company and its Subsidiaries has been
duly organized and is validly existing in good standing under
the laws of its jurisdiction of organization and is duly
qualified to transact business as a foreign organization and is
in good standing under the laws of all other jurisdictions where
the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure
to be so qualified does not amount to a material liability or
disability to the Company and the Subsidiaries, taken as a
whole.
(ii) Each of the Company and its Subsidiaries has the
requisite corporate or equivalent power to own or lease its
properties and conduct its business as described in the
Registration Statement and the Prospectus. The Company has full
corporate power and authority to enter into the Underwriting
Agreement and to consummate the transactions provided for
therein. The Underwriting Agreement and the consummation of the
transactions provided for therein have been duly authorized by
the Company. The issuance and sale of the Securities to the
Underwriters by the Company pursuant to the Underwriting
Agreement, the compliance by the Company with the other terms of
the Underwriting Agreement, and the consummation of the other
transactions therein contemplated do not conflict with and will
not result in the violation by the Company of the provisions of
its Articles of Incorporation or Bylaws.
(iii) The Company has authorized capital stock as set
forth in the Prospectus. The outstanding shares of common stock
of the Company have been duly authorized and are validly issued,
fully paid and non-assessable and are free from preemptive
rights. To the best of such counsel's knowledge, there are no
outstanding options, warrants, or other rights calling for the
issuance of, and no commitment, plan or arrangement to issue or
register, any share of capital stock of the Company or the
Subsidiaries or any security convertible into or exchangeable
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<PAGE> 18
for capital stock of the Company or the Subsidiaries other than
as disclosed in the Registration Statement and the Prospectus.
(iv) The Securities to be issued and sold by the Company
pursuant to the Underwriting Agreement have been duly authorized
and, when issued to and paid for by the Underwriters in
accordance with the terms of the Underwriting Agreement, will be
validly issued, fully paid and non-assessable, and free of
preemptive rights, or, to such counsel's knowledge, other
similar rights. The Securities have been duly authorized for
listing, subject to official notice of issuance, on the AMEX.
(v) The Underwriting Agreement has been executed and
delivered by the Company and, assuming due authorization, is a
valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except (i) as limited
by the effect of bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect
relating to or affecting the rights and remedies of creditors;
(ii) as limited by the effect of general principles of equity,
whether enforcement is considered in a proceeding in equity or
at law, and the discretion of the court before which any
proceeding therefor may be brought; and (iii) as limited by the
unenforceability under certain circumstances under law or court
decisions of provisions providing for the indemnification of or
contribution to an underwriter of securities as contrary to
public policy.
(vi) The issuance, offering and sale of the Securities
by the Company pursuant to this Underwriting Agreement, the
compliance by the Company with the other terms of this
Underwriting Agreement and the consummation by the Company of
the other transactions herein contemplated will not (i) result
in the violation by the Company of any statute, rule or
regulation (other than federal or state securities law, which
are specifically addressed elsewhere herein), (ii) violate any
court order or (iii) result in the breach of or a default under
any of the exhibits to the Registration Statement; and no
consent, approval, authorization or order of, or filing with,
any federal court or governmental agency is required for the
consummation of the issuance and sale of the Securities by the
Company pursuant to this Underwriting Agreement, except such as
have been obtained under the Act and such as may be required
under state securities laws in connection with the purchase and
distribution of such Securities by the Underwriters; provided,
however, that such counsel need express no opinion pursuant to
clauses (i), (ii) or (iii) of this paragraph as to any antifraud
laws which may be applicable.
(vii) The Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement has been issued under the Act and no proceedings
therefor have been initiated or threatened by the Commission.
Any required filing of the Prospectus pursuant to Rule
424(b) under the Act has been made in accordance with Rule
424(b) under the Act.
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(viii) The Registration Statement and the Prospectus
comply as to form in all material respects with the requirements
for registration statements on Form S-2 under the Act and the
rules and regulations of the Commission thereunder (it being
understood, however, that such counsel need not express any
opinion with respect to the financial statements, schedules and
other financial and statistical data included in the
Registration Statement or the Prospectus and that, in passing
upon the compliance as to form of the Registration Statement and
the Prospectus, such counsel may assume that the statements made
therein are correct and complete).
(ix) To the best of such counsel's knowledge, there are
no contracts or documents of a character required under the Act
to be described in the Registration Statement or Prospectus or
to be filed as exhibits to the Registration Statement that are
not described and filed as required.
(x) To the best of such counsel's knowledge, there is no
suit, action or proceeding pending against the Company or its
properties, or by any court, administrative agency or
governmental authority that is required to be described in the
Registration Statement or the Prospectus that is not described
as required.
(xi) The Company is not an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(xii) Any real property and buildings held under lease by
the Company or any of its Subsidiaries or leased by the Company
or any of its Subsidiaries to a third party are held or leased
by the Company or any of its Subsidiaries under valid, binding
and enforceable leases conforming to the description thereof set
forth in the Prospectus, with such exceptions as do not
interfere with the use made and proposed to be made of such
property and buildings by the Company or any of its Subsidiaries
or third parties.
(xiii) The statements set forth in the Prospectus under
the captions "Risk Factors," "The Company," "Business,"
"Management," "Principal and Selling Stockholders," "Certain
Transactions," and "Shares Eligible for Future Sale," insofar as
such statements constitute matters of law or legal conclusions,
have been reviewed by such counsel and are accurate in all
material respects. In addition, each of the transactions
described under "Certain Transactions" has been duly authorized
by all necessary action of the Company, including approvals
of the disinterested members of the Board of Directors of the
Company.
(xiv) No default exists, and no event has occurred which,
with notice or lapse of time or both, would constitute a default
in the due performance and observance of any term, covenant or
condition of any indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective properties is bound or
may be affected in any material adverse respect with regard to
property, business or operations of the Company and its
Subsidiaries.
(xv) The Power of Attorney and the Custody Agreement of
each Selling Stockholder have been duly authorized, executed and
delivered on behalf of such Selling Stockholder and are valid
instruments legally sufficient for the purposes intended.
(xvi) Each Selling Stockholder has full right, power and
authority to enter into and to perform its obligations under
this Agreement and to sell, transfer, assign and deliver the
Option Securities to be sold by such Selling Stockholder
hereunder.
(xvii) This Agreement has been duly authorized, executed
and delivered on behalf of the Selling Stockholder.
(xviii) Upon the delivery of and payment for the Option
Securities contemplated in this Agreement, and upon registration
of the Option Securities in the names of the Underwriters, the
Underwriters will have acquired good and valid title to the
Option Securities being sold by each Selling Stockholder free of
any pledge, lien, security interest, encumbrance, claim or
equitable interest, including any lien in favor of the Company
or any restriction on transfer imposed by the Company; and the
owner of the Option Securities being sold by each Selling
Stockholder hereunder, if other than the Selling Stockholder, is
precluded from asserting against such Underwriters the
ineffectiveness of any unauthorized endorsement.
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In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deem proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
laws of jurisdictions in which such counsel are not admitted to practice, to the
extent satisfactory to counsel for the Underwriters, upon the opinion of local
counsel in such jurisdictions and in the case of the opinion described in
paragraph (i) above upon certificates of public officials. The foregoing opinion
shall also state that the Underwriters are justified in relying upon any such
opinion of such local counsel, and copies of the opinion of such local counsel
shall be delivered to the Representatives and counsel for the Underwriters.
In addition to the matters set forth above, such counsel shall also
state that in the course of the preparation of the Registration Statement and
the Prospectus, such counsel has participated in conferences with officers and
representatives of the Company and with the Company's independent auditors, your
representatives and your counsel, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed and
although they are not passing upon, and do not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus (except as set forth therein) and have
not made any independent check or verification thereof, during the course of
such participation (relying as to the factual matters underlying the
determination of materiality to a large extent upon the statements of officers
or other representatives of the Company), no facts came to their attention that
caused them to believe that the Registration Statement, as of the Effective Date
and as of the date of such opinion, contained or contains any untrue statement
of a material fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date and the date of such opinion, included or
includes any untrue statement of a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. It is understood that
such counsel will express no belief with respect to the financial statements,
the notes thereto and related schedules and other financial, numerical,
statistical and accounting data included or omitted from the Registration
Statement or the Prospectus.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment thereto at the date of such opinion.
(c) The Representatives shall have received an opinion,
dated the Firm Closing Date, of Stroock & Stroock & Lavan LLP, counsel for the
Underwriters, with respect to the issuance and sale of the Firm Securities, the
Registration Statement, the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(d) The Representatives shall have received from KPMG Peat
Marwick a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
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<PAGE> 21
(i) they are independent accountants with respect to the
Company within the meaning of the Act and the applicable rules
and regulations thereunder;
(ii) in their opinion, the audited combined financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form and in
all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations thereunder;
(iii) on the basis of a reading of the latest available
unaudited consolidated financial statements of the Company, a
reading of the unaudited amounts for revenues and total and per
share amounts of net income for the month of _____________ of
1998 and of the unaudited consolidated financial statements of
the Company for the periods from which such amount are derived,
carrying out certain specified procedures (which do not
constitute an examination made in accordance with generally
accepted auditing standards) that would not necessarily reveal
matters of significance with respect to the comments set forth
in this paragraph (iii), a reading of the minute books of the
stockholders, the board of directors and any committees thereof
of the Company and its Subsidiaries, and inquiries of certain
officials of the Company and its accounting matters, nothing
came to their attention that caused them to believe that at a
specific date not more than five business days prior to the date
of such letter, there were any changes in the capital stock or
long-term debt of the Company or its Subsidiaries or any
decreases in net current assets or stockholders' equity of the
Company and its Subsidiaries, in each case combined with amounts
shown on the December 31, 1997 audited consolidated balance
sheet included in the Registration Statement and the Prospectus,
or for the period from January 1, 1998 to such specified date
there were any decreases, as compared with the corresponding
period in the preceding quarter, in revenues, net income before
income taxes or total or per share amounts of net income of the
Company, except in all instances for changes, decreases or
increases set forth in such letter or as set forth in or
contemplated in the Prospectus;
(iv) they have carried out certain specified procedures
not constituting an audit, with respect to certain amounts,
percentages and financial information that are derived from the
general accounting records of the Company and its consolidated
Subsidiaries and are included in the Registration Statement and
the Prospectus under the captions "Capitalization," "Selected
Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business," "Management" and "Certain Transactions" and in the
Financial Statements Schedules of the Registration Statement,
and have compared such amounts, percentages and financial
information with such records of the Company and with
information derived from such records and have found them to be
in agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or
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<PAGE> 22
increases, it shall be a further condition to the obligations of the
Underwriters that (A) such letters shall be accompanied by a written explanation
of the Company as to the significance thereof, unless the Representatives deem
such explanation unnecessary, and (B) such changes, decreases or increases do
not, in the sole judgment of the Representatives, make it impractical or
inadvisable to proceed with the purchase and delivery of the Securities as
contemplated by the Registration Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment thereto at the date of such letter.
(e) The Representatives shall have received a certificate,
dated the Firm Closing Date, of the Chief Executive Officer and the Chief
Financial Officer of the Company to the effect that:
(i) the representations and warranties of the Company in
this Agreement are true and correct as if made on and as of the
Firm Closing Date or the Option Closing Date, as the case may
be, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied at or prior
to such Firm Closing Date or Option Closing Date, as the case
may be;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for
that purpose have been instituted or are pending or, to the best
of the Company's knowledge, are threatened under the Act;
(iii) none of the Registration Statement, the Prospectus
nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the
statements therein not misleading and neither the Preliminary
Prospectus nor any supplement thereto included any untrue
statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading; and
(iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, neither the Company nor any of the Subsidiaries have
incurred up to and including the Firm Closing Date or the Option
Closing Date, as the case may be, other than in the ordinary
course of their respective business or as otherwise disclosed in
the Prospectus, any material liabilities or obligations, direct
or contingent; the Company has not paid or declared any
dividends or other distributions on its capital stock; neither
the Company nor any of the Subsidiaries has entered into any
transactions not in the ordinary course of business; and there
has not been any material change in the capital stock or
long-term debt or any material increase in the short-term
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<PAGE> 23
borrowings of the Company or any of the Subsidiaries; neither
the Company nor any of the Subsidiaries has sustained any
material loss or damage to its property or assets, whether or
not insured; there is no litigation that is pending or, to the
best knowledge of the Company, threatened against the Company or
any of the Subsidiaries that is required to be set forth in an
amended or supplemented Prospectus that has not been set forth;
and there has occurred no event required to be set forth in an
amended or supplemented Prospectus that has not been set forth.
References to the Registration Statement and the Prospectus in this
subsection (i) are to such documents as amended and supplemented at the date of
such certificate.
(f) The Representatives shall have received a certificate,
dated the Firm Closing Date, from each Selling Stockholder (which may be signed
by an Attorney-in-Fact) to the effect that:
(i) The Registration Statement and Prospectus and, if
any, each amendment and each supplement thereto contain all
statements required to be included therein regarding such
Selling Stockholder, and (A) as of the date of such certificate,
(x) the Registration Statement does not contain any untrue
statement of a material fact regarding such Selling Stockholder
or omit to state a material fact regarding such Selling
Stockholder required to be stated therein or necessary in order
to make the statements therein regarding such Selling
Stockholder not misleading and (y) the Prospectus does not
contain any untrue statement of a material fact regarding such
Selling Stockholder or omit to state a material fact regarding
such Selling Stockholder required to be stated therein or
necessary in order to make the statements therein regarding such
Selling Stockholder, in the light of the circumstances under
which they were made, not misleading and (B) since the Effective
Date no event has occurred as a result of which it is necessary
to amend or supplement the Prospectus in order to make the
statements therein regarding such Selling Stockholder not untrue
or misleading in any material respect;
(ii) Each of the representations and warranties of such
Selling Stockholder contained in this Agreement are, at the time
such certificate is delivered, true and correct in all material
respects; and
(iii) Each of the covenants required herein to be
performed by such Selling Stockholder on or prior to the date of
such certificate has been duly, timely and fully performed in
all material respects and each condition herein required to be
complied with such Selling Stockholder on or prior to the
delivery of such certificate has been duly, timely and full
complied with in all material respects.
(g) On or before the Firm Closing Date, the Representatives
and counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from the
Company and the Selling Stockholders.
(h) Prior to the commencement of the offering of the
Securities, the Securities shall have been accepted for listing on the AMEX.
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<PAGE> 24
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company and the Selling Stockholders shall
furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
and counsel for the Underwriters shall reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject under the Act, the
Exchange Act or otherwise, specifically including but not limited to losses,
claims, damages or liabilities related to negligence on the part of any
Underwriter, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any breach of any
representation, warranty, agreement or covenant of the Company herein contained
or any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus or the Prospectus, or any such amendment or
supplement, in reliance upon and in strict conformity with written information
furnished with respect to any Underwriter by such Underwriter expressly for use
in the Registration Statement, any Preliminary Prospectus or the Prospectus or
any amendment or supplement thereto, provided that such written information or
omissions only pertain to disclosures in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto
directly relating to the transactions effected by the Underwriters in connection
with this offering, and provided further that the foregoing indemnity with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) if
such untrue statement or omission or alleged untrue statement or omission made
in any Preliminary Prospectus is eliminated or remedied in the Prospectus and a
copy of the Prospectus has not been furnished to the person asserting any such
loss, claim, damage or liability at or prior to the written confirmation of the
sale of such Securities to such person.
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<PAGE> 25
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each person, if any,
who controls any Underwriter within the meaning of the Act. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise
(b) Each Selling Stockholder, severally and not jointly, agrees
to indemnify and hold harmless each Underwriter against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter may become
subject under the Act, the Exchange Act or otherwise, specifically including
but not limited to losses, claims, damages or liabilities related to negligence
on the part of any Underwriter, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
breach of any representation, warranty, agreement or covenant made by such
Selling Stockholder herein contained or any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; and agrees to reimburse each Underwriter for any legal or other
expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that such Selling Stockholder shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arise out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, any Preliminary Prospectus or the
Prospectus, or any such amendment or supplement, in reliance upon and in strict
conformity with written information furnished with respect to any Underwriter by
such Underwriter expressly for use in the Registration Statement, any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, provided that such written information or omissions only pertain to
disclosures in the Registration Statement, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto directly relating to the
transactions effected by the Underwriters in connection with this offering, and
provided further that the foregoing indemnity with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter (or to the benefit
of any person controlling such Underwriter) if such untrue statement or omission
or alleged untrue statement or omission made in any Preliminary Prospectus is
eliminated or remedied in the Prospectus and a copy of the Prospectus has not
been furnished to the person asserting any such loss, claim, damage or liability
at or prior to the written confirmation of the sale of such Securities to such
person.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each person, if any,
who controls any Underwriter within the meaning of the Act. This indemnity
agreement shall be in addition to any liabilities which such Selling
Stockholder may otherwise have. For purposes of this Agreement, such Selling
Stockholder acknowledges that the statements with respect to the public
offering of the Securities set forth under the heading "Underwriting" and the
stabilization legend in the Prospectus and the last paragraph on the outside
front cover page of the Prospectus have been furnished by the Underwriters
expressly for use therein and constitute the only information furnished in
writing by or on behalf of the Underwriters for inclusion in the Prospectus.
The liability of such Selling Stockholder under this Section 8(b) shall be
limited to an amount equal to the aggregate public offering price of the
Securities sold by such Selling Stockholder to the Underwriters. The Company
and such Selling Stockholder may agree, as among themselves and without
limiting the rights of the Underwriters under this Agreement, as to the
respective amounts of such liability for which they each shall be responsible.
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<PAGE> 26
(c) Each Underwriter, severally and not jointly, will indemnify
and hold harmless the Company and each Selling Stockholder to the same extent as
the foregoing indemnity from the Company and each Selling Stockholder to the
Underwriters but only with respect to statements or omissions, if any, made in
the Registration Statement, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto made in reliance upon, and in strict conformity
with, written information furnished with respect to any Underwriter by such
Underwriter expressly for use in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, provided
that such written information or omissions only pertain to disclosures in the
Registration Statement, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto directly relating to the transactions effected
by the Underwriters in connection with this offering.
The indemnity agreement in this Section 8(c) shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each officer and
director of the Company who has signed the Registration Statement. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have. For purposes of this Agreement, the Company
acknowledges that the statements with respect to the public offering of the
Securities set forth under the heading "Underwriting" and the stabilization
legend in the Prospectus and the last paragraph on the outside front cover page
of the Prospectus have been furnished by the Underwriters expressly for use
therein and constitute the only information furnished in writing by or on behalf
of the Underwriters for inclusion in the Prospectus.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein and, to the extent
that it may wish, jointly with any other indemnifying party similarly notified,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
26
<PAGE> 27
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend such
action, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representatives in
the case of paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions),
(ii) the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party. After such notice from the indemnifying party to such
indemnified party, the indemnifying party will not be liable for the costs and
expenses of any settlement of such action effected by such indemnified party
without the consent of the indemnifying party, (which consent shall not be
unreasonably withheld) unless such indemnified party waived its rights under
this Section 8 in which case the indemnified party may effect such a settlement
without such consent.
(e) In circumstances in which the indemnity agreement provided
for in the preceding paragraphs of this Section 8 is unenforceable or otherwise
unavailable or insufficient to hold harmless an indemnified party in respect of
any losses, claims, damages or liabilities (or actions in respect thereof), each
indemnifying party, in order to provide for just and equitable contribution,
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect (i) the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the offering of the Securities or (ii) if
the allocation provided by the foregoing clause (i) is not permitted by
applicable law, not only such relative benefits but also the relative fault of
the indemnifying party or parties on the one hand and the indemnified party on
the other in connection with the statements or omissions or alleged statements
or omissions that resulted in such losses, claims, damages or liabilities (or
actions in respect thereof). The relative benefits received by the Company and
the Selling Stockholders on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company and the Selling Stockholders
bear to the total underwriting discounts and commissions received by the
Underwriters. The relative fault of the parties shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Stockholders or the
Underwriters, the parties' relative intents, knowledge, access to information
and opportunity to correct or prevent statement or omission,
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<PAGE> 28
and any other equitable considerations appropriate in the circumstances. The
Company, the Selling Stockholders and the Underwriters agree that it would not
be equitable if the amount of such contribution were determined by pro rata or
per capita allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take into
account the equitable considerations referred to in the first sentence of this
paragraph (d). Notwithstanding any other provision of this paragraph (d), no
Underwriter shall be obligated to make contributions hereunder that in the
aggregate exceed the total underwriting discounts and commissions received by it
with respect to the Securities purchased by such Underwriter under this
Agreement, less the aggregate amount of any damages that such Underwriter has
otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion to
their respective underwriting obligations and not joint, and contributions among
Underwriters shall be governed by the provisions of the Master Agreement Among
Underwriters. For purposes of this paragraph (e), each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
shall have the same rights to contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default
in their obligations to purchase Firm Securities or Option Securities hereunder
and the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 11 hereof. In the event of any default by one or more Underwriters as
described in this Section 8, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 1 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and delivery of the Firm Securities or Option
Securities, as the case may be. As used in this Agreement, the term
"Underwriter"
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includes any person substituted for an Underwriter under this Section 8. Nothing
herein shall relieve any defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, its
officers, the Selling Stockholders and the several Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, any of its officers or
directors, any Selling Stockholder, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the
Securities. The respective agreements, covenants, indemnities and other
statements set forth in Sections 6 and 8 hereof shall remain in full force and
effect, regardless of any termination or cancellation of this Agreement.
11. Termination. This Agreement may be terminated with respect to
the Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company given prior to the Firm Closing Date or
the related Option Closing Date, respectively, in the event that the Company or
any Selling Stockholder fails to perform its obligations and satisfy all
conditions on its part to be performed or satisfied hereunder at or prior
thereto or, if at or prior to the Firm Closing Date or such Option Closing Date,
respectively, the Representatives determines in its sole discretion that:
(a) trading in the Securities or trading in the Common
Stock shall have been suspended by the Commission or trading in securities
generally on the AMEX, New York Stock Exchange or the International Stock
Exchange of the United Kingdom shall have been suspended or minimum or maximum
prices shall have been established for the Common Stock on either such exchange;
(b) a banking moratorium shall have been declared by New
York, California, United Kingdom or United States authorities; or
(c) there shall have been (i) an outbreak or escalation of
hostilities between the United States or the United Kingdom and any foreign
power, (ii) an outbreak or escalation of any other insurrection or armed
conflict involving the United States or the United Kingdom or (iii) any other
calamity or crisis having an effect on the financial markets that makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the securities as contemplated by the Registration Statement.
12. Information Supplied by Underwriters. The statements set
forth in the last paragraph on the front cover page and under the heading
"Underwriting" in the Prospectus (to the extent such statements relate to the
Underwriters) constitute the only information furnished by any Underwriter
through the Representatives to the Company for the purposes of Sections 2 and
8(b) hereof.
13. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed or delivered or
telegraphed and confirmed in writing to Schroder & Co. Inc., 787 Seventh Avenue,
5th Floor, New York, New York 10019, Attention:
29
<PAGE> 30
Bradley G. Razook, if sent to the Company, shall be mailed, delivered or
telegraphed and confirmed in writing to the Company at 11100 Santa Monica
Boulevard, Suite 300, Los Angeles, California 90025, Attention: Mr. Timothy
O'Brien.
14. Successors. This Agreement shall inure to the benefit of and
shall be binding upon the several Underwriters, the Company and its respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company contained in Section 8 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (ii) the indemnities of the Underwriters contained in Section 8 of this
Agreement shall also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Securities from any
Underwriter shall be deemed a successor because of such purchase.
15. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS.
16. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
30
<PAGE> 31
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.
Very truly yours,
THE SPORTS CLUB COMPANY, INC.
By:
--------------------------------------
Name:
Title:
SELLING STOCKHOLDERS
By:
--------------------------------------
Attorney-in-Fact for the Selling
Stockholders named in Schedule I hereto
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
SCHRODER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
SUTRO & CO. INCORPORATED
For themselves and the other
several Underwriters, if any,
named in Schedule 1 to the
foregoing Agreement
By: SCHRODER & CO. INC.
By:
-------------------------------------
Name:
Title:
For itself and the other Representatives
31
<PAGE> 32
SCHEDULE 1
UNDERWRITERS' COMMITMENTS
Number of
Firm Securities
to be Purchased
from the Company
Underwriter
- ---------------------------------- ---------------------
Schroder & Co. Inc.
Prudential Securities Incorporated
Sutro & Co. Incorporated
----------------
TOTAL .............. 6,000,000
=================
<PAGE> 33
SCHEDULE 2
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of
Option Securities to be Sold
----------------------------
<S> <C>
The Jared R. Talla Irrevocable Trust dated January 4, 1993 (1)..........................50,000
The Brett M. Talla Irrevocable Trust dated January 4, 1993 (2)..........................50,000
----------
Total..................................................................................100,000
</TABLE>
- -------------------------------------------
(1) Address for notices:
c/o
----------------------
-----------------------
-----------------------
-----------------------
(2) Address for notices:
c/o
----------------------
-----------------------
-----------------------
-----------------------
<PAGE> 34
EXHIBIT A
March __, 1998
SCHROEDER & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
SUTRO & CO. INCORPORATED
As Representatives of the
several Underwriters
c/o Schroeder & Co. Inc.
787 Seventh Avenue
5th Floor
New York, New York 10019
Ladies and Gentlemen:
The undersigned is an executive officer or director of the Sports club
company, Inc., a Delaware corporation (the "Company"). The undersigned
understands that the Company has filed a registration statement on Form S-2,
Registration No. 333-46973 (the "Registration Statement"), with the Securities
and Exchange Commission, together with the prospectus relating to the proposed
underwritten offering (the "Offering") by the Company of shares of Common
Stock, $.01 par value per share (the "Common Stock").
In order to induce the Company, you and the other underwriters of the
Offering, for which Schroeder & Co. Inc., Prudential Securities Incorporated
and Sutro & Co. Incorporated intend to act as representatives, to proceed with
the Offering, the undersigned hereby agrees that the undersigned will not,
directly or indirectly, for a period of 90 days after the date hereof, without
the prior written consent of Schroeder & Co. Inc., sell, offer to sell, contract
to sell, grant any option to purchase or otherwise dispose (or announce any
offer, sale, grant of any option to purchase or other disposition) of any
shares of Common Stock or any securities convertible into, or exercisable or
exchangeable for, shares of Common Stock.
This letter shall have no further force or effect if the Company and the
several Underwriters shall not have executed and delivered respective
underwriting agreements related to the Offering by April 30, 1998 or if any
underwriting agreement entered into by such parties shall be terminated prior
to the initial closing date provided for therein.
[Remainder of this page intentionally left blank.]
31
<PAGE> 35
This letter agreement shall not prohibit the undersigned from
transferring any shares of Common Stock to members of his or her immediate
family or to a trust for their benefit, provided that such persons or trust
agree to be bound by the terms hereof.
Very truly yours,
By:
----------------------
Name:
32
<PAGE> 1
SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT
(this "Amendment"), dated as of March 16, 1998, is entered into by and among THE
SPORTS CLUB COMPANY, INC., a Delaware corporation, and certain of its
subsidiaries identified in the signature pages to this Amendment (collectively,
"Borrowers"), SUMITOMO BANK OF CALIFORNIA, a California banking corporation
("Sumitomo"), COMERICA BANK - CALIFORNIA, a California banking corporation
("Comerica", and collectively with Sumitomo, "Banks"), and Sumitomo in its
capacity as agent for Banks (in such capacity, "Agent"), in light of the
following facts:
RECITALS
A. Pursuant to that certain Amended and Restated Loan Agreement,
dated as of February 2, 1998 and as amended by a First Amendment to Amended and
Restated Loan Agreement dated as of February 23, 1998 (collectively, the "Loan
Agreement"), Banks are providing Borrowers with certain credit facilities.
B. Borrowers, Banks and Agent wish to amend the Loan Agreement
to, among other things, provide for the deferment of the termination of the
Commitment and prepayment of the Obligations.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrowers, the Banks and the Agent hereby agree as follows:
1. Defined Terms. All initially capitalized terms set forth
without definition in this Amendment (including, without limitation, in the
recitals hereto) shall have the respective meanings assigned thereto in the Loan
Agreement.
2. Amendments to Definitions. Section 1.1 of the Loan Agreement
is hereby amended such that the definition set forth below shall read in full as
follows:
"Line B Availability" means, as of each date of determination,
the Line B Commitment minus the aggregate amount of all Line B
Loans made by the Banks (including any Outstanding Standby
Letters of Credit, not to exceed the Maximum Standby Letter of
Credit Amount), less any amount by which Borrowers have failed to
comply with the Liquidity Requirement and less any permanent
reductions pursuant to Section 2.2(a).
-1-
<PAGE> 2
3. Standby Letters of Credit.
(a) Section 2.6(a) of the Loan Agreement is amended and
restated to read as follows:
"(a) Subject to the terms and conditions hereof, at any time and
from time to time from the Closing Date to the earlier of 60 days
from the Effective Date or June 29, 1998, the Issuing Bank shall
issue such Standby Letters of Credit as a Responsible Official of
a Borrower on behalf of the Borrowers may request by a Request
for Standby Letter of Credit; provided that, upon giving effect
to such Standby Letter of Credit, (i) the Total Outstanding shall
not exceed $15,000,000, (ii) the issuance of the Standby Letter
of Credit shall not result in an amount which exceeds the Line B
Availability and (iii) the Outstanding Standby Letters of Credit
shall not exceed the Maximum Standby Letter of Credit Amount. If
any Standby Letter of Credit is canceled or otherwise expires or
terminates without it being drawn upon, such cancellation,
expiration or termination shall not effect a permanent reduction
of the Line B Availability pursuant to Section 2.2(a) by the
amount of such Standby Letter of Credit, but instead such amount
may be reborrowed. Unless the Requisite Banks otherwise consent
in writing, the term of any Standby Letter of Credit shall not
exceed the earlier of 60 days from the Effective Date or June 30,
1998. If, as of the immediately preceding date, or upon any
earlier termination or acceleration of the Commitment and any
Loans thereunder, there exist any Outstanding Standby Letters of
Credit, Borrowers shall provide to Agent a standby letter of
credit issued by a bank satisfactory to the Requisite Banks, in
form and substance satisfactory to the Requisite Banks, in favor
of the Banks in a face amount equal to Outstanding Standby
Letters of Credit on that date, or shall make other provisions
satisfactory to the Requisite Banks 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 the Requisite Banks, the face amount of
any Standby Letter of Credit shall not be less than $250,000."
4. Equity or Debt Offering. Section 3.1(f) of the Loan Agreement
is amended and restated to read as follows:
"(f) In addition to all other payments hereunder, all
Obligations, including payment of all indebtedness owing under
the Notes, shall be fully due and payable upon the consummation
of SCC, Inc.'s $50,000,000 proposed securities offering or other
equity or debt offering in any amount by or for the
-2-
<PAGE> 3
benefit of any of the Borrowers, and the Commitment shall
terminate; provided, however that if (i) the proposed $50,000,000
equity offering is consummated on or before April 30, 1998 and
(ii) within 5 days thereafter, Borrower shall have complied with
the conditions precedent to this Second Amendment, Banks will
defer the acceleration of all Obligations pursuant to this
Section 3.1(f) for a period of 60 days following the consummation
of such offering but in any event not later than June 30, 1998.
Consummation of the $50,000,000 equity offering shall mean SCC,
Inc.'s successfully concluding the sale of a sufficient number of
shares of common stock to raise, after deduction for normal
expenses, not less than $40 million with such proceeds
irrevocably delivered to SCC, Inc.
5. Indebtedness, Guaranties and Liens. Section 6.9(c) of the Loan
Agreement is amended and restated to read as follows:
"(c) Indebtedness and Liens securing obligations incurred in
connection with the financing or re-financing of any real
property assets of Borrowers or Non-Borrower Affiliates, to the
extent such financing has been approved by the Requisite Banks,
or (ii) incurred in connection with SCC, Inc.'s $50,000,000
proposed securities offering or other equity or debt offering in
any amount by or for the benefit of any of the Borrowers, to the
extent approved by the Requisite Banks."
6. Conditions Precedent. The effectiveness of Section 4 of this
Amendment ("Effective Date") is subject to the prior satisfaction of each of the
following conditions:
(a) all obligations owing by any Borrower to AT&T
Commercial shall have been fully paid, all collateral for such AT&T
obligations shall have been released, all security interests, Liens or
Guaranties in favor of AT&T shall have been terminated and the Special
Deposit Account Agreement and Subordination Agreement shall have been
terminated.
7. Representations and Warranties. Each representation and
warranty made by the Borrowers in Article 4 of the Loan Agreement is true and
correct on and as of the date hereof as though made as of the date hereof,
except to the extent such representations and warranties relate solely to an
earlier date.
8. Full Force and Effect. Each of the Loan Documents is hereby
amended such that all references to the Loan Agreement contained in any of such
documents shall be deemed to be made with respect to the Loan Agreement as
amended by this Amendment.
-3-
<PAGE> 4
Except as amended hereby, the Loan Agreement and the other Loan Documents shall
remain unaltered and in full force and effect.
9. Counterparts. This Amendment may be executed in multiple
counterparts, each of which shall constitute an original and all of which, taken
together, shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment by their respective duly authorized officers as of the date first
above written.
The "Borrowers"
THE SPORTS CLUB COMPANY, INC.,
a Delaware corporation
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Chief Financial Officer
THE SPECTRUM CLUB COMPANY, INC.,
a California corporation
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Chief Financial Officer
PONTIUS REALTY, INC.,
a New York corporation
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Chief Financial Officer
-4-
<PAGE> 5
SPORTS CLUB, INC. OF CALIFORNIA,
a California corporation
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Chief Financial Officer
IRVINE SPORTS CLUB, INC.,
a California corporation
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Chief Financial Officer
THE SPORTSMED COMPANY, INC.,
a California corporation
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Chief Financial Officer
L.A./IRVINE SPORTS CLUB, LTD.,
a California limited partnership
By:Sports Club, Inc. of California,
General Partner
By /s/ TIMOTHY O'BRIEN
---------------------------------
Timothy O'Brien
Its: Chief Financial Officer
-5-
<PAGE> 6
TALLA NEW YORK, INC.,
a New York corporation
By /s/ TIMOTHY O'BRIEN
-------------------------------
Timothy O'Brien
Chief Financial Officer
SCC SPORTS CLUB, INC.,
a Texas corporation
By /s/ TIMOTHY O'BRIEN
-------------------------------
Timothy O'Brien
Chief Financial Officer
GREEN VALLEY SPECTRUM CLUB, INC.,
a Nevada corporation
By /s/ TIMOTHY O'BRIEN
-------------------------------
Timothy O'Brien
Chief Financial Officer
SPECTRUM CLUB/ANAHEIM HILLS, INC.,
a California corporation
By /s/ TIMOTHY O'BRIEN
-------------------------------
Timothy O'Brien
Chief Financial Officer
-6-
<PAGE> 7
The "Agent"
SUMITOMO BANK OF CALIFORNIA,
a California banking corporation
By /s/ NOEL R. RYAN, JR.
-----------------------------
Noel R. Ryan, Jr.
Senior Vice President
The "Banks"
SUMITOMO BANK OF CALIFORNIA,
a California banking corporation
By /s/ NOEL R. RYAN, JR.
-----------------------------
Noel R. Ryan, Jr.
Senior Vice President
COMERICA BANK - CALIFORNIA,
a California banking corporation
By /s/ JOSEPH YUROSEK
-----------------------------
Joseph Yurosek
Vice President
Address:
Comerica Bank - California
301 E. Ocean Boulevard, Suite 1800
Long Beach, California 90802
Attn: Joseph Yurosek, Vice President
Telecopier: (562) 595-8251
Telephone: (562) 590-2530
-7-
<PAGE> 1
March 5, 1998
Mr. John Gibbons
President
The Sports Club Company
11100 Santa Monica Blvd.
Suite 300
Los Angeles, CA 90025
Re: AT&T Commercial Finance Corporation Loan to LA/Irvine Sports
Clubs, Ltd. (the "Loan")
Dear John:
Per your letter request of February 25, 1998, and notwithstanding the
provisions of Section 2.04 of the Loan Agreement ("Loan Agreement") made as of
March 9, 1996 by and between AT&T Commercial Finance Corporation ("AT&T CFC")
and L.A./Irvine Sports Clubs, Ltd. ("Borrower") prohibiting prepayment of the
above-referenced Loan, AT&T CFC agrees as follows:
AT&T CFC will accept a prepayment of the Loan in full during the period
from January 15, 1998 to April 30, 1998, subject to the following conditions:
1. AT&T CFC's receipt of a least 10 days prior written notice of
Borrower's intent to repay the Loan in its entirety, including
all principal, interest, late fees and any other Loan
obligations. Such notice shall specify expected date of
prepayment so that AT&T CFC may prepare a payoff letter for the
Loan; and
2. AT&T CFC's receipt of a Prepayment Premium equal to the greater
of (i) $2,800,000 or (ii) $2,800,000 plus any additional breakage
cost for any decrease in interest rates between March 31, 1998
and the prepayment date which shall in no event be later than
April 30, 1998 (interest rate set two business days prior to the
prepayment date) at the time of payment of all other amounts then
outstanding
<PAGE> 2
Mr. John Gibbons
March 5, 1998
Page 2
under the Loan.
Borrower shall prepare and deliver to AT&T CFC at Borrower's expense
such releases of all liens or interests held by AT&T CFC in connection with the
Loan as Borrower deems appropriate. AT&T CFC will execute and forward such
releases per Borrower's direction upon its receipt of the Prepayment Premium
specified above and all other amounts outstanding under the Loan.
The limited waiver by AT&T CFC of the prohibition against full
prepayment during the time period and subject to the conditions described above
and this letter shall not:
a. operate as a waiver of any right, power or remedy of the
Lender under the Loan Documents;
b. operate as a waiver of any provision of the Loan
Documents except as specifically set forth herein;
c. be deemed a waiver of any other subsequent or different
prepayment term or other term or condition with such
provision or any other provision of the Loan Agreement;
nor
d. be deemed a course of dealing with respect to any such
limited waiver.
Terms defined in the Loan Agreement which are used herein shall have the
same meaning set forth in the Loan Agreement unless otherwise specified herein.
Please confirm your acceptance of the terms of this limited offer of
early prepayment rights by signing and returning one original of this letter to
my attention by no later than March 13, 1998. We will understand your failure to
timely sign and return this letter to be a rejection of the offer contained
herein.
If you have any questions, please do not hesitate to call me.
Sincerely,
<PAGE> 3
Mr. John Gibbons
March 5, 1998
Page 3
/s/ DEBORAH J. HEILMAN
Deborah J. Heilman
THE ABOVE TERMS ARE ACCEPTED BY:
LA/Irvine Sports Clubs, Ltd.
By: Sports Club, Inc. of California
Its: General Partner
By:/s/ JOHN M. GIBBONS
----------------------------------
Its: President
---------------------------------
cc: Rob Golding
<PAGE> 1
Exhibit 10.84
STANDARD OFFER, AGREEMENT AND ESCROW
INSTRUCTIONS FOR PURCHASE OF REAL ESTATE
(Non-Residential)
American Industrial Real Estate Association
February 3, 1998
-----------------------------
(Date for Reference Purposes)
1. Buyer.
1.1 THE SPORTS CLUB COMPANY, INC. (the "Buyer hereby offers to purchase
-----------------------------
the real property, hereinafter described, from the owner thereof (the "Seller")
(collectively, the "Parties" or individually, a "Party through an escrow (the
"Escrow") to close on June 24, 1998 (the "Expected Closing Date") to be
held by Texas State Title Company (the "Escrow Holder") whose address is
- --------------------------------------------------------------------------------
, Phone No. , Facsimile No.
- ------------------------ --------------- ---------------
upon the terms and conditions set forth in this agreement (the "Agreement").
Buyer shall have the right to assign Buyer's rights hereunder, but any such
assignment shall not relieve Buyer of Buyer's obligations herein unless the
Seller expressly releases Buyer.
1.2 The term "Date of Agreement" as used herein shall be the date when by
execution and delivery (as defined in paragraph 20.2) of this document or a
subsequent counter-offer thereto, Buyer and Seller have reached agreement in
writing whereby Seller agrees to sell, and Buyer agrees to purchase the
Property upon terms accepted by both Parties.
2. PROPERTY.
2.1 The real property (the "Property") that is the subject of this offer
consists of (insert a brief physical description) 3.5 acres of land improved
with a retail nursery building and parking lot is located in the City of
Houston, County of Harris State of Texas, is commonly known by the street
address of McQue Street and U.S. Route 59 and Interstate 610 and is legally
described as: To be finished in escrow.
2.2 If the legal description of the Property is not complete or is
inaccurate, this Agreement shall not be invalid and the legal description shall
be completed or corrected to meet the requirements of Texas State Title Company
(the "Title Company") which Title Company shall issue the title policy
hereinafter described.
2.3 the Property includes, at no additional cost to Buyer, the permanent
improvements thereon, including those items which the law of the state in which
the Property is located provides is part of the Property, as well as the
following items, if any, owned by Seller and presently located in the Property
electrical distribution systems (power panels, buss ducting, conduits,
disconnects, lighting fixtures), telephone distribution systems (lines, jacks
and connections), space heaters, air conditioning equipment, air lines, fire
sprinkler systems, security systems, carpets, window coverings, wall coverings,
and n/a (collectively, the "Improvements").
3. PURCHASE PRICE.
3.1 The purchase price (the "Purchase Price") to be paid by Buyer to
Seller for the Property shall be $3,050,000 payable as follows:
(a) Cash down payment, including the Deposit as defined in paragraph
4.3 (or if an all cash transaction, the Purchase price): $ 250,000.
Total Purchase Price: $3,050,000
3.2 If an Existing Deed of Trust permits the beneficiary thereof to
require payment of a transfer fee as a condition to the transfer of the Property
subject to such Existing Deed of Trust, Buyer agrees to pay transfer fees and
costs of up to one and one-half percent (1 1/2%) of the unpaid principal balance
of the applicable Existing Note.
4. DEPOSITS.
4.1 Buyer will deliver funds the sum of $250,000.00, payable to Texas
State Title Company immediately upon mutual execution of this agreement, to be
(check applicable box) [] forthwith deposited in the payee's trust account
[] held uncashed until the Date of Agreement. When cashed, the check shall be
deposited into the payee's trust account to be applied toward the Purchase
Price of the Property at the Closing, as defined in paragraph 8.3. Should Buyer
and Seller not enter into an agreement for purchase and sale, Buyer's check or
funds shall, upon request by Buyer, be promptly returned to Buyer.
page 1
<PAGE> 2
4.2 Subject to the satisfaction of all contingencies specified herein
Buyer shall deposit with Escrow Holder the additional sum of $ none to be
applied to the Purchase Price at the Closing.
4.3 The funds deposited with the Escrow Holder by or on behalf of Buyer
under paragraphs 4.1 and 4.2, above (collectively the "Deposit"), shall be
deposited by Escrow Holder in such State of Federally chartered bank as Buyer
may select and in such interest-bearing account or accounts as Escrow Holder or
Broker(s) deem appropriate and consistent with the timing requirements of this
transaction. The interest therefrom shall accrue to the benefit of Buyer, who
hereby acknowledges that there may be penalties of interest forfeitures if the
applicable instrument is redeemed prior to its specified maturity. Buyer's
Federal Tax Identification Number is 95-3519027.
7. REAL ESTATE BROKERS.
7.1 The following real estate broker(s) (collectively, the "Brokers") and
brokerage relationships exist in this transaction and are consented to by the
parties (check applicable boxes): Advisors, L.L.P.
[X] Riverstone Realty represents Seller exclusively ("SELLER'S BROKER")
[X] The Weatherby Co. represents Buyer exclusively ("BUYER'S BROKER"); or
[ ] represents both Seller and Buyer ("DUAL AGENCY"). (Also
see Paragraph 26.)
(the "Broker(s)"),all such named Broker(s) being the procuring cause(s) of this
Agreement. See paragraph 26 for Disclosures Regarding the Nature of a Real
Estate Agency Relationship. Buyer shall use the services of Buyer's Broker
exclusively in connection with any and all negotiations and offers with respect
to the property described in paragraph 2.1 for a period of one year from the
date above.
7.2 Buyer and Seller each represent and warrant to the other that
he/she/it has had no dealings with any person, firm, broker or finder in
connection with the negotiation of this Agreement and/or the consummation of the
purchase and sale contemplated herein, other than the Broker(s) named in
paragraph 7.1, and no broker or other person, firm or entity, other than said
Broker(s) is/are entitled to any commission or finder's fee in connection with
this transaction as the result of any dealings or acts of such Party. Buyer and
Seller do each herby agree to indemnify, defend, protect and hold the other
harmless from and against any costs, expenses or liability for compensation,
commission or charges which may be claimed by any broker, finder or other
similar party, other than said named Broker(s) by reason of any dealings or act
of the indemnifying Party.
8. ESCROW AND CLOSING.
8.1 Upon acceptance hereof by Seller, this Agreement, including any
counter-offers incorporated herein by the Parties, shall constitute not only the
agreement of purchase and sale between Buyer and Seller, but also instructions
to Escrow Holder for the consummation of the Agreement through the Escrow.
Escrow Holder shall not prepare any further escrow instructions restating or
amending this Agreement unless specifically so instructed by the Parties of a
Broker herein.
8.2 Escrow Holder is hereby authorized and instructed to conduct the
Escrow in accordance with this Agreement, applicable law, custom and practice of
the community in which Escrow Holder is located, including any reporting
requirements of the Internal Revenue Code. In the event of a conflict between
the law of the state where the Property is located and the law of the state
where the Escrow Holder is located, the law of the state where the Property is
located shall prevail.
8.3 Subject to satisfaction of the contingencies herein described, Escrow
Holder shall close this escrow (the "Closing") by recording the grant deed and
other documents required to be recorded and by disbursing the funds and
documents in accordance with this Agreement.
8.4 If this transaction is terminated for non-satisfaction and non-waiver
of a Buyer's Contingency, s defined in paragraph 9.4, then neither of the
Parties shall thereafter have any liability to the other under this Agreement,
except to the extent of the breach of any affirmative covenant or warranty in
this Agreement that may have been involved. In the event of such termination,
Buyer shall be promptly refunded all funds deposited by or on behalf of Buyer
with a Broker, Escrow Holder or Seller, less only Title Company and Escrow
Holder cancellation fees and costs, all of which shall be Buyer's obligation.
8.5 The Closing shall occur on the Expected Closing Date, or as soon
thereafter as the Escrow is in condition for Closing; provided, however, that if
the Closing does not occur by the Expected Closing Date and the Expected Closing
Date is not extended by mutual instructions of the Parties, a Party hereto not
then in default under this Agreement may notify the other Party, Escrow Holder,
and Broker(s), in writing that, unless the Closing occurs within five (5)
business days following said notice, the Escrow and this Agreement shall be
deemed terminated without further notice or instructions.
8.6 Should the Closing not occur during said five (5) day period, this
Agreement and Escrow shall be deemed terminated and Escrow Holder shall
forthwith return all monies and documents, less only Escrow Holder's reasonable
fees and expenses, to the Party who deposited them. Such Party shall indemnify
and hold Escrow holder harmless in connection with such return. However, no
refunds or documents shall be returned to a party claimed by written notice to
Escrow Holder to be in default under this Agreement.
8.7 Except as otherwise provided herein, the termination of Escrow and
this Agreement and /or the return of deposited funds or documents shall not
relieve or release either Buyer or Seller from any obligation to pay Escrow
Holder's fees and costs or constitute a waiver, release or discharge of any
breach or default that has occurred in the performance of the obligations,
agreements covenants or warranties contained herein.
8.8 If this Agreement terminates for any reason other than Seller's breach
or default, then at Seller's request, and as a condition to the return of
Buyer's deposit, Buyer shall within five (5) days after written request deliver
to Seller, at no charge, copies of all surveys, engineering studies, soil
reports, maps, master plans, feasibility studies and other similar items
prepared by or for Buyer that pertain to the Property.
9. CONTINGENCIES TO CLOSING .
9.1 The Closing of this transaction is contingent upon the satisfaction or
waiver of the following contingencies:
(a) Disclosure. Buyer's receipt and written approval, within ten
(10) days after delivery to Buyer, of a completed Property Information Sheet
(the "Property Information Sheet"), concerning the Property, duly executed by or
on behalf of Seller in the current form or equivalent to that published by the
American Industrial Real Estate Association (the "A.I.R."). Seller shall provide
Buyer with the Property Information Sheet within ten (10) days following the
Date of Agreement. See also paragraph 2.5 for possible additional disclosure
and contingency regarding a "Commercial Property Earthquake Weakness Disclosure
Report."
(b) Physical Inspection. Buyer's written approval, within ten (10)
days following the later of the Date of Agreement or receipt by Buyer of the
Property Information Sheet, of an inspection by Buyer, at Buyer's expense, of
the physical aspects of the Property.
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(c) Hazardous Substance Conditions Report. Buyer's written approval,
within one (1) day following the later of the Date of Agreement or receipt by
Buyer of the Property Information Sheet, of a Hazardous Substance Conditions
Report concerning the Property and relevant adjoining properties. Such report
will be obtained at Buyer's direction and expense. A "Hazardous Substance" for
purposes of this Agreement is defined as any substance whose nature and/or
quantity of existence, use, manufacture, disposal or effect, render it subject
to Federal, state or local regulation, investigation, remediation or removal as
potentially injurious to public health or welfare. A "Hazardous Substance
Condition" for purposes of this Agreement is defined as the existence on, under
or relevantly adjacent to the Property of a Hazardous Substance that would
require remediation and/or removal under applicable Federal, state or local law.
(d) Soil Inspection. Buyer's written approval, within one (1) day
after the later of the Date of Agreement or receipt by Buyer of the Property
Information Sheet, of a soil test report concerning the Property. Said report
shall be obtained at Buyer's direction and expense. Seller shall promptly
provide to Buyer copies of any existing soils reports that Seller may have.
(e) Governmental Approvals. Buyer's receipt, within fifteen (15)
days of the Date of Agreement, of all approvals and permits from governmental
agencies or departments which have or may have jurisdiction over the Property
which Buyer deems necessary or desirable in connection with its intended use of
the Property, including, but not limited to, permits and approvals required
with respect to zoning, planning, building and safety, fire, police,
handicapped access, transportation and environmental matters. Buyer's failure
to deliver to Escrow Holder and Seller written notice terminating this
Agreement prior to the expiration of said fifteen (15) day period as a result
of Buyer's failure to obtain such approvals and permits shall be conclusively
deemed to be Buyer's waiver of this condition to Buyer's obligations under this
Agreement.
(f) Condition of Title. Buyer's written approval of a current
preliminary title report concerning the Property (the "PTR") issued by the Title
Company, as well as all documents (the "Underlying Documents") referred to in
the PTR, and the issuance by the Title Company of the title policy described in
10.1. Seller shall cause the PTR and all Underlying Documents to be delivered
to Buyer promptly after the Date of Agreement. Buyer's approval is to be given
within ten (10) days after receipt of said PTR and legible copies of all
Underlying Documents. The disapproval by Buyer of any monetary encumbrance,
which by the terms of this Agreement is not to remain against the Property
after the Closing, shall not be considered a failure of this condition as
Seller shall have the obligation, at Seller's expense, to satisfy and remove
such disapproved monetary encumbrance at or before the Closing.
(g) Survey. Buyer's written approval, within one (1) day after
receipt of the PTR and Underlying Documents, of an ALTA title supplement based
upon a survey prepared to American Land Title Association (the "ALTA") standards
for an owner's policy by a licensed surveyor, showing the legal description and
boundary lines of the Property, any easements of record, and any improvements,
poles, structures and things located within ten (10) feet either side of the
Property boundary lines. The survey shall be prepared at Buyer's direction and
expense. If Buyer has obtained a survey and approved the ALTA title supplement,
Buyer may elect within the period allowed for Buyer's approval of a survey to
have an ALTA extended coverage owner's form of title policy, in which event
Buyer shall pay any additional premium attributable thereto.
(h) Existing Leases and Tenancy Statements. Buyer's written
approval, within ten (10) days after receipt of legible copies of all leases,
subleases or rental arrangements (collectively the "Existing Leases") affecting
the Property, and a statement (the "Tenancy Statement") in the latest form or
equivalent to that published by the A.I.R., executed by Seller and each tenant
and subtenant of the Property. Seller shall use its best efforts to provide
Buyer with said Existing Leases and Tenancy Statements promptly after the Date
of Agreement.
(i) Other Agreements. Buyer's written approval, within ten (10) days
after receipt, of a copy of any other agreements ("Other Agreements") known to
Seller that will affect the Property beyond the Closing. Seller shall cause
said copies to be delivered to Buyer promptly after the Date of Agreement.
(j) Financing. If paragraph 5 hereof dealing with a financing
contingency has not been stricken, the satisfaction or waiver of such New Loan
contingency.
(k) Existing Notes. If paragraph 3.1(c) has not been stricken,
Buyer's written approval, within ten (10) days after receipt, of conformed and
legible copies of the Existing Notes, Existing Deeds of Trust and related
agreements (collectively the "Loan Documents") to which the Property will
remain subject after the Closing, including a beneficiary statement (the
"Beneficiary Statement") executed by the holders of the Existing Notes
confirming: (1) the amount of the unpaid principal balance, the current
interest rate, and the date to which interest is paid, and (2) the nature and
amount of any impounds held by the beneficiary in connection with said loan.
Seller shall use its best efforts to provide Buyer with said Loan Documents and
Beneficiary Statement promptly after the Date of Agreement. Buyer's obligation
to close is further conditioned upon Buyer's being able to purchase the
Property without acceleration or change in the terms of any Existing Notes or
charges to Buyer except as otherwise provided in this Agreement or approved by
Buyer, provided, however, Buyer shall pay the transfer fee referred to in
paragraph 3.2 hereof.
(l) Destruction, Damage or Loss. There shall not have occurred prior
to the Closing, a destruction of, or damage or loss to, the Property or any
portion thereof, from any cause whatsoever, which would cost more than
$10,000.00 to repair or cure. If the cost to repair or cure is $10,000.00 or
less, Seller shall repair or cure the loss prior to the Closing. Buyer shall
have the option, within ten (10) days after receipt of written notice of a loss
costing more than $10,000.00 to repair or cure, to either terminate this
transaction or to purchase the Property notwithstanding such loss, but without
deduction or offset against the Purchase Price. If the cost to repair or cure is
more than $10,000.00, and Buyer does not elect to terminate this transaction,
Buyer shall be entitled to any insurance proceeds applicable to such loss.
Unless otherwise notified in writing by either Party or Broker, Escrow Holder
shall assume no destruction, damage or loss costing more than $10,000.00 to
repair or cure has occurred prior to Closing.
(m) Material Change. No Material Change, as hereinafter defined,
shall have occurred with respect to the Property that has not been approved in
writing by Buyer. For purposes of this Agreement, a "Material Change" shall be
a change in the status of the use, occupancy, tenants, or condition of the
Property as reasonably expected by the Buyer, that occurs after the date of
this offer and prior to the Closing. Buyer shall have ten (10) days following
receipt of written notice from any source of any such Material Change within
which to approve or disapprove same. Unless otherwise notified in writing by
either Party or Broker, Escrow Holder shall assume that no Material Change has
occurred prior to the Closing.
(n) Seller Performance. The delivery of all documents and the due
performance by Seller of each and every undertaking and agreement to be
performed by Seller under this Agreement.
(o) Breach of Warranty. That each representation and warranty of
Seller herein be true and correct as of the Closing. Escrow Holder shall assume
that this condition has been satisfied unless notified to the contrary in
writing by Buyer or Broker(s) prior to the Closing.
(p) Broker's Fee. Payment at the Closing of such Broker's Fee as is
specified in this Agreement or later written instructions to Escrow Holder
executed by Seller and Broker(s). It is agreed by Buyer, Seller and Escrow
Holder that Broker(s) is/are a third party beneficiary of this Agreement insofar
as the Broker's fee is concerned, and that no change shall be made by Buyer,
Seller or Escrow Holder with respect to the time of payment, amount of payment,
or the conditions to payment of the Broker's fee specified in this Agreement,
without the written consent of Broker(s).
9.2 All of the contingencies specified in sub-paragraphs (a) through (o)
of paragraph 9.1 are for the benefit of, and may be waived by, Buyer, and may be
elsewhere herein referred to as "Buyer Contingencies."
9.5 Buyer understands and agrees that until such time as all Buyer's
Contingencies have been satisfied or waived, Seller and/or its agents may
solicit, entertain and/or accept back-up offers to purchase the subject
Property in the event the transaction covered by this Agreement is not
consummated.
9.6 As defined in subparagraph 9.1 (c), Buyer and Seller acknowledge that
extensive local, state and Federal legislation establish broad liability upon
owners and/or users of real property for the investigation and remediation of a
Hazardous Substance Condition. The determination of the existence of a
Hazardous Substance Condition and the evaluation of such a condition are highly
technical and beyond the expertise of Broker(s). Buyer and Seller acknowledge
that they have been advised by Broker(s) to consult their own technical and
legal experts with respect to the possible Hazardous Substance Condition
aspects of this Property or adjoining properties, and Buyer and Seller are not
relying upon any investigation by or statement of Broker(s) with respect
thereto Buyer and Seller hereby assume all responsibility for the impact of
such Hazardous Substance Conditions upon their respective interests herein.
10. DOCUMENTS REQUIRED AT CLOSING:
10.1 Escrow Holder shall cause to be issued to Buyer a standard
coverage (or ALTA extended, if so elected under paragraph 9.1(f)) owner's form
policy of title insurance effective as of the Closing, issued by the Title
Company in the full amount of the Purchase Price, insuring title to the Property
vested in Buyer, subject only to the exceptions approved by Buyer. In the event
there is a Purchase Money Deed of Trust in this transaction, the policy of title
insurance shall be a joint protection policy insuring both Buyer and Seller.
"IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO
OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY
BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE
PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN
ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING."
10.2 Seller shall deliver or cause to be delivered to Escrow Holder in
time for delivery to Buyer at the Closing, an original ink signed:
(a) Grant deed (or equivalent), duly executed and in recordable
form, conveying fee title to the Property to Buyer.
(b) If paragraph 3.1(c) has not been stricken, the Beneficiary
Statements concerning Existing Note(s).
<PAGE> 4
(c) If applicable, the Existing Leases and Other Agreements together
with duly executed assignments thereof by Seller and Buyer. The assignment of
Existing Leases shall be on the most recent Assignment and Assumption of
Lessor's Interest in Lease form published by the A.I.R. or its equivalent.
(d) If applicable, the Tenancy Statements executed by Seller and the
Tenant(s) of the Property.
(e) An affidavit executed by Seller to the effect that Seller is not
a "foreign person" within the meaning of Internal Revenue Code Section 1445 or
successor statutes. If Seller does not provide such affidavit in form
reasonably satisfactory to Buyer at least three (3) business days prior to the
Closing. Escrow Holder shall at the closing deduct from the Seller's proceeds
and remit to Internal Revenue Service such sum as is required by applicable
Federal law with respect to purchases form foreign sellers.
10.3 Buyer shall deliver or cause to be delivered to Seller through escrow:
(a) The cash portion of the Purchase Price and such additional sums
as are required of Buyer under this Agreement for prorations, expenses and
adjustments. The balance of the cash portion of the Purchase Price, including
Buyer's escrow charges and other cash charges, if any, shall be deposited by
Buyer with Escrow Holder, by cashier's check drawn upon a local major banking
institution, federal funds wire transfer, or any other method acceptable to
Escrow Holder as immediately collectable funds, no later than 11:00 o'clock
A.M. on the business day prior to the Expected Closing Date.
(b) If a Purchase Money Note and Purchase Money Deed of Trust are
called for by this Agreement, the duly executed originals of those documents,
the Purchase Money Deed of Trust being in recordable form, together with
evidence of fire insurance on the improvements in the amount of the full
replacement cost naming Seller as a mortgage loss payee, and a real estate tax
service contract (at Buyer's expense), assuring Seller of notice of the status
of payment of real property taxes during the life of the Purchase Money Note.
(c) The assumption portion of the Assignment and Assumption of
Lessor's Interest in Lease form specified in paragraph 10.2(c), above, duly
executed by Buyer with respect to the obligations of the Lessor accruing after
the Closing as to each Existing Lease.
(d) Assumptions duly executed by Buyer of the obligations of Seller
that accrue after Closing under any Other Agreements.
(e) If applicable, a written assumption duly executed by Buyer of
the loan documents with respect to Existing Notes.
11. PRORATIONS, EXPENSES AND ADJUSTMENTS.
11.1 Taxes. Real property taxes payable by the owner of the Property shall
be prorated through Escrow as of the date of the Closing, based upon the latest
tax bill available. The Parties agree to prorate as of the Closing any taxes
assessed against the Property by supplemental bill levied by reason of events
occurring prior to the Closing. Payment shall be made promptly in cash upon
receipt of a copy of any such supplemental bill of the amount necessary to
accomplish such proration. Seller shall pay and discharge in full at or before
the Closing the unpaid balance of any special assessment bonds.
11.2 Insurance. If Buyer elects to take an assignment of the existing
casualty and/or liability insurance that is maintained by Seller, the current
premium therefor shall be prorated through Escrow as of the date of Closing.
11.3 Rentals, Interest and Expenses. Collected rentals, interest on
Existing Notes, utilities, and operating expenses shall be prorated as of the
date of Closing. The Parties agree to promptly adjust between themselves
outside of Escrow any rents received after the Closing.
11.4 Security Deposit. Security Deposits held by Seller shall be given to
Buyer by a credit to the cash required of Buyer at the Closing.
11.5 Post Closing Matters. Any item to be prorated that is not determined
or determinable at the Closing shall be promptly adjusted by the Parties by
appropriate cash payment outside of the Escrow when the amount due is
determined.
11.8 Escrow Costs and Fees. Buyer and Seller shall each pay one-half of
the Escrow Holder's charges and Seller shall pay the usual recording fees and
any required documentary transfer taxes. Seller shall pay the premium for a
standard coverage owner's or joint protection policy of title insurance.
12. REPRESENTATION AND WARRANTIES OF SELLER AND DISCLAIMER.
12.1 Seller's warranties and representations shall survive the Closing and
delivery of the deed, and, unless otherwise noted herein, are true, material
and relied upon by the Buyer and Broker(s) in all respects, both as of the Date
of Agreement, and as of the date of Closing. Seller hereby makes the following
warranties and representations to Buyer and Broker(s):
(a) Authority of Seller. Seller is the owner of the Property and/or
has the full right, power and authority to sell, convey and transfer the
Property to Buyer as provided herein, and to perform Seller's obligations
hereunder.
(b) Maintenance During Escrow and Equipment Condition At Closing.
EXCEPT as otherwise provided in paragraph 9.1(1) hereof dealing with
destruction, damage or loss, Seller shall maintain the Property until the
Closing in its present condition, ordinary wear and tear excepted. The heating,
ventilating, air conditioning, plumbing, elevators, loading doors and
electrical systems shall be in good operating order and condition at the time
of Closing.
(c) Hazardous Substances/Storage Tanks. Seller has no knowledge,
except as otherwise disclosed to Buyer in writing, of the existence or prior
existence on the Property of any Hazardous Substance (as defined in paragraph
9.1(c)), nor of the existence or prior existence of any above or below ground
storage tanks or tanks.
(d) Compliance. Seller has no knowledge of any aspect or condition of
the Property which violates applicable laws, rules, regulations, codes, or
covenants, conditions or restrictions, or of improvements or alterations made
to the Property without a permit where one was required, or of any unfulfilled
order or directive of any applicable governmental agency or casualty insurance
company that any work of investigation, remediation, repair, maintenance or
improvement is to be performed on the Property.
(e) Changes in Agreements. Prior to the Closing, Seller will not
violate or modify, orally or in writing, any Existing Lease or Other Agreement,
or create any new leases or other agreements affecting the Property, without
Buyer's written approval, which approval will not be unreasonably withheld.
(f) Possessory Rights. Seller has no knowledge that anyone will, at
the Closing, have any right to possession of the Property, except as disclosed
by this Agreement or otherwise in writing to Buyer.
(g) Mechanics' Liens. There are no unsatisfied mechanic's or
materialman's lien rights concerning the Property.
(h) Actions, Suits or Proceedings. Seller has no knowledge of any
actions, suits or proceedings pending or threatened before any commission,
board, bureau, agency, instrumentality, arbitrator(s) court or tribunal that
would affect the Property or the right to occupy or utilize same.
(i) Notice of Changes. Seller will promptly notify Buyer and
Broker(s) in writing of any Material Change (as defined in paragraph 9.1(m))
affecting the Property that becomes known to Seller prior to the Closing.
(j) No Tenant Bankruptcy Proceedings. Seller has no notice or
knowledge that any tenant of the Property is the subject of bankruptcy or
insolvency proceeding.
(k) No Seller Bankruptcy Proceedings. Seller is not the subject of a
bankruptcy, insolvency or probate proceeding.
12.2 Buyer hereby acknowledges that, except as otherwise stated in this
Agreement, Buyer is purchasing the Property in its existing condition and will,
by the time called for herein, make or have waived all inspections of the
Property Buyer believes are necessary to protect its own interest in, and its
contemplated use of, the Property. The Parties acknowledge that, except as
otherwise stated in this Agreement, no representations, inducements, promises,
agreements, assurances oral or written, concerning the Property, or any aspect
of the Occupational Safety and Health Act, hazardous substance laws, or any
other act, ordinance or law, have been made by either Party or Broker, or
relied upon by either Party hereto.
13. POSSESSION.
13.1 Possession of the Property shall be given to Buyer at the Closing
subject to the rights of tenants under Existing Leases.
14. BUYER'S ENTRY.
14.1 At any time during the Escrow period, Buyer, and its agents and
representatives, shall have the right at reasonable times and subject to rights
of tenants under Existing Leases, to enter upon the Property for the purpose of
making inspections and tests specified in this Agreement. Following any such
entry or work, unless otherwise directed in writing by Seller, Buyer shall
return the Property to the condition it was in prior to such entry or work,
including the recompaction or removal of any disrupted soil or material as
Seller may reasonably direct. All such inspections and tests and any other work
conducted or materials furnished with respect to the Property by or for Buyer
shall be paid for by Buyer as and when due and Buyer shall indemnify, defend,
protect and hold harmless Seller and the Property of and from any and all
claims, liabilities, demands, losses, costs, expenses (including reasonable
attorney's fees), damages or recoveries, including those for injury to person
or property, arising out of or relating to any such work or materials or the
acts or omissions of Buyer, its agents or employees in connection therewith.
15. FURTHER DOCUMENTS AND ASSURANCES.
15.1 Buyer and Seller shall each, diligently and in good faith, undertake
all actions and procedures reasonably required to place the Escrow in condition
for Closing as and when required by this Agreement. Buyer and Seller agree to
provide all further information, and to execute and deliver all further
documents and instruments, reasonably required by Escrow Holder or the Title
Company.
16. ATTORNEYS' FEES.
16.1 In the event of any litigation of arbitration between the Buyer,
Seller, and Broker(s), or any of them, concerning this transaction, the
prevailing party shall be entitled to reasonable attorney's fees and costs. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred in good faith.
17. PRIOR AGREEMENTS/AMENDMENTS.
17.1 The contract in effect as of the Date of Agreement supersedes any
and all prior agreements between Seller and Buyer regarding the Property.
17.2 Amendments to this Agreement are effective only if made in writing
and executed by Buyer and Seller.
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18. BROKER'S RIGHTS.
18.1 If this sale shall not be consummated due to the default of either
the Buyer or Seller, the defaulting party shall be liable to and shall pay to
Broker(s) the commission that Broker(s) would have received had the sale been
consummated. This obligation of Buyer, if Buyer is the defaulting party, is in
addition to any obligation with respect to liquidated damages.
18.2 Upon the Closing, Broker(s) is/are authorized to publicize the facts
of this transaction.
19. NOTICES.
19.1 Whenever any Party hereto, Escrow Holder or Broker(s) herein shall
desire to give or serve any notice, demand, request, approval or other
communication, each such communication shall be in writing and shall be
delivered personally, by messenger or by mail, postage prepaid, addressed as
set forth adjacent to that party's or Broker's signature on this Agreement or
by telecopy with receipt confirmed by telephone. Service of any such
communication shall be deemed made on the date of actual receipt at such
address.
19.2 Any Party or Broker hereto may from time to time, by notice in
writing served upon the other Party as aforesaid, designate a different address
to which, or a different person or additional persons to whom, all
communications are thereafter to be made.
20. DURATION OF OFFER.
20.1 If this offer shall not be accepted by Seller on or before 5:00 P.M.
according to the time standard applicable to the city of Los Angeles, CA on the
date of February 20, 1998, it shall be deemed automatically revoked.
20.2 The acceptance of this offer, or of any subsequent count-offer
hereto, that creates an agreement between the Parties as described in paragraph
12, shall be deemed made upon delivery to the other Party or either Broker
herein of a duly executed writing unconditionally accepting the last
outstanding offer or counter-offer.
21. LIQUIDATED DAMAGES. (This Liquidated Damages paragraph is applicable only
if initialled by both parties.)
21.1 THE PARTIES AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY
DIFFICULT TO FIX, PRIOR TO SIGNING THIS AGREEMENT, THE ACTUAL DAMAGES WHICH
WOULD BE SUFFERED BY SELLER IF BUYER FAILS TO PERFORM ITS OBLIGATIONS UNDER
THIS AGREEMENT. THEREFORE, IF, AFTER THE SATISFACTION OR WAIVER OF ALL
CONTINGENCIES PROVIDED FOR THE BUYER'S BENEFIT, BUYER BREACHES THIS AGREEMENT,
SELLER SHALL BE ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF $250,000 PLUS
INTEREST, IF ANY, ACCRUED THEREON. UPON PAYMENT OF SAID SUM TO SELLER, BUYER
SHALL BE RELEASED FROM ANY FURTHER LIABILITY TO SELLER, AND ANY ESCROW
CANCELLATION FEES AND TITLE COMPANY CHARGES SHALL BE PAID BY SELLER.
/s/ DMT /s/ DMT
--------------- ---------------
BUYER INITIALS SELLER INITIALS
23. APPLICABLE LAW.
23.1 This Agreement shall be governed by, and paragraph 22.3 amended to
refer to, the laws of the state in which the Property is located.
24. TIME OF ESSENCE.
24.1 Time is of the essence of this Agreement.
25. COUNTERPARTS.
25.1 This Agreement may be executed by Buyer and Seller in counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument. Escrow Holder, after verifying that the
counterparts are identical except for the signatures, is authorized and
instructed to combine the signed signature pages on one of the counterparts,
which shall then constitute the Agreement.
26. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP.
26.1 The Parties and Broker(s) agree that their relationship(s) shall be
governed by the principles set forth in California Civil Code, Section 2375, as
summarized in the following paragraph 26.2.
26.2 When entering into a discussion with a real estate agent regarding a
real estate transaction, a Buyer or Seller should from the outset understand
what type of agency relationship or representation it has with the agent or
agents in the transaction. Buyer and Seller acknowledge being advised by the
Broker(s) in this transaction, as follows:
(a) Seller's Agent. A Seller's Agent under a listing agreement with
the Seller acts as the agent for the Seller only. A Seller's agent or subagent
has the following affirmative obligations: (1) To the Seller: A fiduciary duty
of utmost care, integrity, honesty, and loyalty in dealings with the Seller. (2)
To the Buyer and the Seller: a. Diligent exercise of reasonable skill and care
in performance of the agent's duties. b. A duty of honest and fair dealing and
good faith. c. A duty to disclose all facts known to the agent materially
affecting the value or desirability of the property that are not known to, or
within the diligent attention and observation of, the Parties. An agent is not
obligated to reveal to either Party any confidential information obtained from
the other Party which does not involve the affirmative duties set forth above.
(b) Buyer's Agent. A selling agent can, with a Buyer's consent, agree
to act as agent for the Buyer only. In these situations, the agent is not the
Seller's agent, even if by agreement the agent may receive compensation for
services rendered, either in full or in part from the Seller. An agent acting
only for a Buyer has the following affirmative obligations. (1) To the Buyer: A
fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with
the Buyer. (2) To the Buyer and the Seller: a. Diligent exercise of reasonable
skill and care in performance of the agent's duties. b. A duty of honest and
fair dealing and good faith. c. A duty to disclose all facts known to the agent
materially affecting the value or desirability of the property that are not
known to, or within the diligent attention and observation of, the Parties. An
agent is not obligated to reveal to either Party any confidential information
obtained from the other Party which does not involve the affirmative duties set
forth above.
MSS PA
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(c) Agent Representing Both Seller and Buyer. A real estate agent,
either acting directly or through one or more associate licenses, can legally
be the agent of both the Seller and the Buyer in a transaction, but only with
the knowledge and consent of both the Seller and the Buyer. (1) In a dual
agency situation, the agent has the following affirmative obligations to both
the Seller and the Buyer: a. A fiduciary duty of utmost care, integrity,
honesty and loyalty in the dealings with either Seller or Buyer. b. Other
duties to the Seller and the Buyer as stated above in their respective sections
(a) or (b) of this paragraph 26.2. (2) In representing both Seller and Buyer,
the agent may not without the express permission of the respective Party,
disclose to the other Party that the Seller will accept a price less than the
listing price or that the Buyer will pay a price greater than the price offered.
(3) The above duties of the agent in a real estate transaction do not relieve a
Seller or Buyer from the responsibility to protect their own interests. Buyer
and Seller should carefully read all agreements to assure that they adequately
express their understanding of the transaction. A real estate agent is a person
qualified to advise about real estate. If legal or tax advise is desired,
consult a competent professional.
(d) Further Disclosures. Throughout this transaction Buyer and
Seller may receive more than one disclosure, depending upon the number of
agents assisting in the transaction. Buyer and Seller should each read its
contents each time it is presented, considering the relationship between them
and the real estate agent in this transaction and that disclosure.
26.3 Confidential Information. Buyer and Seller agree to identify to
Broker(s) as "Confidential" any communication or information given Broker(s)
that is considered by such Party to be confidential.
27. ADDITIONAL PROVISIONS:
Additional provisions of this offer, if any, are as follows or are
attached hereto by an addendum consisting of paragraphs_______through_______.
(It will be presumed no other provisions are included unless specified here.)
SEE ADDENDUM
BUYER AND SELLER HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN AND ARE NOW ADVISED BY
THE BROKER(S) TO CONSULT AND RETAIN THEIR OWN EXPERTS TO ADVISE AND REPRESENT
THEM CONCERNING THE LEGAL AND INCOME TAX EFFECTS OF THIS AGREEMENT, AS WELL AS
THE CONDITION AND/OR LEGALITY OF THE PROPERTY, THE IMPROVEMENTS AND EQUIPMENT
THEREIN, THE SOIL THEREOF, THE CONDITION OF TITLE THERETO, THE SURVEY THEREOF,
THE ENVIRONMENTAL ASPECTS THEREOF, THE INTENDED AND/OR PERMITTED USAGE THEREOF,
THE EXISTENCE AND NATURE OF TENANCIES THEREIN, THE OUTSTANDING OTHER AGREEMENTS,
IF ANY, WITH RESPECT THERETO, AND THE EXISTING OR CONTEMPLATED FINANCING
THEREOF, AND THAT THE BROKER(S) IS/ARE NOT TO BE RESPONSIBLE FOR PURSUING THE
INVESTIGATION OF ANY SUCH MATTERS UNLESS EXPRESSLY OTHERWISE AGREED TO IN
WRITING BY BROKER(S) AND BUYER OR SELLER.
THIS FORM IS NOT FOR USE IN CONNECTION
WITH THE SALE OF RESIDENTIAL PROPERTY.
IF THIS AGREEMENT HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY
THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS AGREEMENT OR THE
TRANSACTION INVOLVED HEREIN. THE UNDERSIGNED BUYER OFFERS AND AGREES TO BUY THE
PROPERTY ON THE TERMS AND CONDITIONS STATED AND ACKNOWLEDGES RECEIPT OF A COPY
HEREOF.
BROKER:
The Weatherby Co.
By /s/ W. J. WEATHERBY Date 3/5/98
Name Printed: W.J. Weatherby
Title: Owner
Address: 11100 Santa Monica Blvd., No. 300
Los Angeles, CA 90025
Telephone: (310) 479-5200 Facsimile No.: (310) 479-8879
BUYER:
The sports Club Company, Inc.
By /s/ MARK SPINO Date 3-5-98
Name Printed: Mark Spino
Title: Vice President
Address: 11100 Santa Monica Blvd., No. 300
Los Angeles, CA 90025
Telephone: (310) 470-5200 Facsimile No.: (310) 479-8879
28. ACCEPTANCE.
28.1 Seller accepts the foregoing offer to purchase the Property and
hereby agrees to sell the Property to Buyer on the terms and conditions therein
specified.
28.2 Seller acknowledges that Broker(s) has/have been retained to locate a
Buyer and is/are the procuring cause of the purchase and sale of the Property
set forth in this Agreement. In consideration of real estate brokerage service
rendered by Broker(s), Seller agrees to pay Broker(s) a real estate brokerage
fee in a sum equal to _____% of the Purchase Price (the "Broker(s) Fee")
divided equally in such shares as said Broker(s) shall direct in writing. As is
provided in paragraph 9.1(p), this Agreement shall serve as an irrevocable
instruction to Escrow Holder to pay such brokerage fee to Broker(s) out of the
proceeds accruing to the account of Seller at the Closing.
28.3 Seller acknowledges receipt of a copy hereof and authorizes the
Broker(s) to deliver a signed copy to Buyer.
NOTE: A PROPERTY INFORMATION SHEET IS REQUIRED TO BE DELIVERED TO BUYER BY
SELLER UNDER THIS AGREEMENT.
BROKER: SELLER: RIVERSTONE REALTY ADVISORS, LLC
__________________________________ ________________________________________
By____________________DATE________ BY /s/ PETER APPEL DATE____________
Name Printed:_____________________ Name Printed: Peter Appel
Title:____________________________ Title: Manager
Address:__________________________ Address: 343 West Manhattan Avenue
__________________________________ Santa Fe, New Mexico 87501
Telephone:________________________ Telephone: (505) 988-2700
Facsimile No.:____________________ Facsimile No.: (505) 988-2793
<PAGE> 7
EXHIBIT "1"
TO OFFER TO PURCHASE, SALE AGREEMENT
AND JOINT ESCROW INSTRUCTIONS
<PAGE> 8
RECORDING REQUESTED )
BY AND WHEN RECORDED )
RETURN TO: )
)
LIDDELL, SAPP, ZIVLEY, HILL & LABOON, LLP )
3400 Chase Tower )
600 Travis )
Houston, Texas 77002-3098 )
Attn: Brett Hamilton )
- --------------------------------------------------------------------------------
PROHIBITED USES COVENANT
THIS PROHIBITED USES COVENANT (the "Covenant") is made as of the ____
day of _____________, 1998, by __________________________________, a
______________ corporation ("Owner"), and Riverstone Realty Advisors, L.L.C.
("Riverstone").
RECITALS
A. Riverstone is the fee owner of that certain real property located in
the City of Houston, Harris County, State of Texas, more particularly described
in Schedule 1 attached hereto and made a part hereof (the "Riverstone Property")
containing approximately 7 acres.
B. Riverstone and The Sports Club Company, Inc., a Delaware corporation
("SCC"), entered into that certain Standard Offer, Agreement and Escrow
Instructions for Purchase of Real Estate dated as of February 3, 1998
("Agreement"), whereby Riverstone agreed to sell to SCC, and SCC agreed to
purchase from Riverstone, real property located adjacent to the Riverstone
Property, more particularly described in Schedule 2 attached hereto and made a
part hereof (the "SCC Property") containing approximately 3.5 acres. Owner is
the successor to SCC under the Agreement (the Riverstone Property and the SCC
Property, collectively, the "Properties" and, individually, a "Property").
C. The Agreement provides in part that neither SCC nor Riverstone, nor
any successor to either of SCC or Riverstone, shall construct, operate or allow
to be operated on its respective Property any prohibited use, as described in
this Covenant.
D. The recordation of this Covenant is intended to impose restrictions
on the operations of each Property for the benefit of the other Property.
NOW, THEREFORE, Riverstone and Owner each hereby covenants, agrees and
declares that all of its interests as the same may from time to time appear in
its respective Property shall be held and conveyed subject to the following
covenants, conditions and restrictions, which are hereby declared to be for the
benefit of the other Property and may be enforced by the owner (or any successor
owner) of such other Property.
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<PAGE> 9
1. Restrictions. There shall not be constructed, operated or allowed to
be operated on either Property, or any portion thereof, any one or more of the
following uses:
(a) Convenience store or gas station.
(b) Fast food restaurant or restaurant with drive-thru facilities.
(c) Assembly, servicing, industrial, manufacturing, warehousing or
distribution facility.
(d) Bowling alley.
(e) Mobile home park.
(f) Outdoor storage facility (except a facility ancillary to another
permitted use).
(g) Sale of new or used vehicles.
(h) The sale or viewing of erotic, pornographic or sexually oriented
books, paraphernalia, films, videos or other material.
(i) An establishment providing any kind of sexual or lewd
entertainment, activity, or conduct, or a sexually oriented
business; provided that massage by licensed professionals as
part of a health or fitness facility shall not be prohibited.
(j) Commercial excavation of building or construction materials (but
excluding temporary excavation in connection with construction
of improvements on the Burdened Property).
(k) Dumping, disposal, incineration, or reduction of garbage, sewer,
dead animals or refuse, or the construction or operation of
water or sewer treatment plant or electrical substation.
(l) Smelting of iron, tin, zinc or other ores, or refining of
petroleum or its products.
(m) Storage in bulk of junk or used materials.
2. Term. This Covenant shall remain in full force and effect until
December 31, 2040.
3. Running with the Land. The covenants, conditions and restrictions
contained herein shall run with the ownership interests of each Property, shall
be binding upon all parties having or acquiring any right or title in said
ownership interests of any part thereof
-2-
<PAGE> 10
and shall be enforceable by the owner from time to time of each Property as
equitable servitudes.
4. Attorneys Fees. In the event of any dispute between any fee owner of
all or any portion of one Property and any fee owner of all or any portion of
the other Property arising out of or in relation to this Covenant, including
without limitation any action brought by any owner of one Property to enforce
this Covenant, the prevailing party shall be entitled to recover, without
limitation, its attorneys fees and costs from the non-prevailing party. In the
event the non-prevailing party does not reimburse the prevailing party within 20
days of demand being made for such reimbursement, such demand to be accompanied
by reasonable evidence of such fees and costs, the prevailing party shall have a
lien on the Property owned by the non-prevailing party to the extent of the
amount unpaid by the non-prevailing party, which amount shall bear interest at
15% per annum or the highest rate of interest not prohibited by law at the time
of the expiration of said 20 days, whichever is less, from the date of
expiration of said 20 days until paid. Such lien may be established as provided
by filing a notice claiming a lien (a "Lien Claim") in the real property records
of Harris County, Texas, which Lien Claim shall include (i) a statement
concerning the basis for the Lien Claim and identifying the lien claimant as a
claiming party, (ii) an identification of the non-prevailing party, (iii) a
description of the expenses incurred which have given rise to the Lien Claim and
a statement itemizing the amount thereof, and (iv) a statement that the lien is
claimed pursuant to the provisions of this paragraph. The lien represented by
the Lien Claim shall attach, shall be effective and shall have a priority from
the date the Lien Claim is recorded solely in the amount claimed and may be
enforced or foreclosed by filing a suit to foreclose such lien under the
applicable provisions of the laws of the State of Texas.
5. Amendment. This Covenant may not be modified in any respect
whatsoever, or rescinded, in whole or in part, except by written instrument
executed by all fee owners of the Properties and by all mortgage lienholders
having a lien on either of the Properties and recorded in the Official Records
of Harris County, Texas.
6. Governing Laws. This Covenant shall be construed, interpreted,
governed and enforced in accordance with the laws of the State of Texas.
7. Headings. The headings of this Covenant are for purposes of reference
only and shall not limit or define the meaning of the provisions of this
Covenant.
-3-
<PAGE> 11
8. Priority. This Covenant shall be prior and superior in position to
any deed of trust lien or other mortgage lien against either Property, but a
Lien Claim will be subordinate to any deed of trust or other mortgage lien
recorded prior to recording of such Lien Claim.
IN WITNESS WHEREOF, this Covenant has been executed upon the day and
year first above written.
"OWNER"
___________________________,
a ___________________ corporation
By:___________________________________________
Print Name:___________________________________
Its:__________________________________________
"RIVERSTONE"
Riverstone Realty Advisors, L.L.C.,
a ____________________ limited liability company
By:___________________________________________
Print Name:___________________________________
Its:__________________________________________
-4-
<PAGE> 12
STATE OF CALIFORNIA )
) ss.
COUNTY OF _________________________ )
On February ___, 1998, before me, ____________________, personally
appeared __________________________________, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature__________________________
-5-
<PAGE> 13
Schedule 1
LEGAL DESCRIPTION OF RIVERSTONE PROPERTY
-6-
<PAGE> 14
Schedule 2
LEGAL DESCRIPTION OF SCC PROPERTY
-7-
<PAGE> 15
RECORDING REQUESTED )
BY AND WHEN RECORDED )
RETURN TO: )
)
RESCH POLSTER ALPERT & BERGER LLP )
10390 Santa Monica Blvd. )
Fourth Floor )
Los Angeles, CA 90025 )
Attn: Nicolas Ramniceanu, Esq. )
- --------------------------------------------------------------------------------
EXCLUSIVE ATHLETIC CLUB COVENANT
THIS EXCLUSIVE ATHLETIC CLUB COVENANT (the "Covenant") is made as of the
____ day of _____________, 1998, by RIVERSTONE REALTY ADVISORS, L.L.C., a
______________ limited liability company ("Riverstone").
RECITALS
A. Riverstone is the fee owner of that certain real property located in
the City of Houston, Harris County, State of Texas, more particularly described
in Schedule 1 attached hereto and made a part hereof (the "Burdened Property")
containing approximately 7 acres.
B. Riverstone and The Sports Club Company, Inc., a Delaware corporation
("SCC") entered into that certain Standard Offer, Agreement and Escrow
Instructions for Purchase of Real Estate dated as of February 3, 1998
("Agreement"), whereby Riverstone agreed to sell to SCC, and SCC agreed to
purchase, from Riverstone real property located adjacent to the Burdened
Property, more particularly described in Schedule 2 attached hereto and made a
part hereof (the "Benefited Property") containing approximately 3.5 acres.
C. The Agreement provides in part that Riverstone and any successor of
Riverstone, shall not construct, operate or allow to be operated on the Burdened
Property any one or more common area "tenant amenity type" or commercial health
clubs, athletic clubs, commercial gyms or other fitness facilities (including,
without limitation, any aerobic studio, cardiovascular area or indoor basketball
or volleyball court or courts) containing, in the aggregate, more than 1,500
square feet of total floor area under any one or more roofs.
D. The recordation of this Covenant is intended to impose restrictions
on the operations of the Burdened Property for the benefit of the Benefitted
Property.
NOW, THEREFORE, Riverstone hereby covenants, agrees and declares that
all of its
-1-
<PAGE> 16
interests as the same may from time to time appear in the Burdened Property
shall be held and conveyed subject to the following covenants, conditions and
restrictions which are hereby declared to be for the benefit of the Benefited
Property and may be enforced by the owner of the Benefitted Property (or any
successor owner).
1. Restrictions. There shall not be constructed, operated or allowed to
be operated on the Burdened Property, or any portion thereof, any one or more
common area "tenant amenity type" fitness facilities, commercial health clubs,
commercial athletic clubs, commercial gyms or any other type of noncommercial or
commercial fitness facilities (including, without limitation, any aerobic
studio, cardiovascular area or indoor basketball or indoor volleyball court or
courts) (collectively, "Facilities") containing, in the aggregate, more than
1,500 square feet of total floor area under any one or more roofs. Thus, for
example and without limitation, an apartment building located on the Burdened
Property shall be permitted to have a 1000 square foot "tenant amenity type"
workout area under roof only if such Facility, when added to the square footage
of all other Facilities under roof on the Burdened Property, does not cause
there to be Facilities containing, in the aggregate, in excess of 1,500 square
feet under roof on the Burdened Property.
2. Term. This Covenant shall remain in full force and effect until
December 31, 2040.
3. Running with the Land. The covenants, conditions and restrictions
contained herein shall run with the ownership interests of the Burdened
Property, shall be binding upon all parties having or acquiring any right or
title in said ownership interests of any part thereof and shall be enforceable
by the owner, from time to time, of the Benefitted Property as equitable
servitudes.
4. Attorneys Fees. In the event of any dispute between any fee owner of
all or any portion of the Benefited Property and any fee owner of all or any
portion of the Burdened Property arising out of or in relation to this Covenant,
including without limitation any action brought by any owner of the Benefitted
Property to enforce this Covenant, the prevailing party shall be entitled to
recover, without limitation, its attorneys fees and costs from the
non-prevailing party. In the event the non-prevailing party does not reimburse
the prevailing party within 20 days of demand being made for such reimbursement,
such demand to be accompanied by reasonable evidence of such fees and costs, the
prevailing party shall have a lien on the Benefitted Property or Burdened
Property, as applicable, owned by the non-prevailing party to the extent of the
amount unpaid by the non-prevailing party, which amount shall bear interest at
15% per annum or the highest rate of interest not prohibited by law at the time
of the expiration of said 20 days, whichever is less, from the date of
expiration of said 20 days until paid. Such lien may be established as provided
by filing a notice claiming a lien (a "Lien Claim") in the real property records
of Harris County, Texas, which Lien Claim shall include (i) a statement
concerning the basis for the Lien Claim and identifying the lien claimant as a
claiming party, (ii) an identification of the non-prevailing party, (iii) a
description of the expenses incurred which have given rise to the Lien Claim and
a statement itemizing the amount thereof, and (iv) a statement that the lien is
claimed pursuant to the provisions of this paragraph. The lien represented by
the Lien
-2-
<PAGE> 17
Claim shall attach, shall be effective and shall have a priority from the date
the Lien Claim is recorded solely in the amount claimed and may be enforced or
foreclosed by filing a suit to foreclose such lien under the applicable
provisions of the laws of the State of Texas.
5. Amendment. This Covenant may not be modified in any respect
whatsoever, or rescinded, in whole or in part, except by written instrument
executed by all fee owners of the Burdened Property and the Benefited Property
and by all mortgage lienholders having a lien on either of the Burdened Property
or the Benefitted Property and recorded in the Official Records of Harris
County, Texas.
6. Governing Laws. This Covenant shall be construed, interpreted,
governed and enforced in accordance with the laws of the State of Texas.
7. Headings. The headings of this Covenant are for purposes of reference
only and shall not limit or define the meaning of the provisions of this
Covenant.
8. Priority. This Covenant shall be prior and superior in position to
any deed of trust lien or other lien or claim against the Burdened Property, but
a Lien Claim shall be subordinate to any deed of trust or other mortgage lien
recorded prior to recording of such Lien Claim.
IN WITNESS WHEREOF, this Covenant has been executed upon the day and
year first above written.
RIVERSTONE REALTY ADVISORS, L.L.C.,
a ____________________ limited liability company
By:___________________________________________
Print Name:___________________________________
Its:__________________________________________
-3-
<PAGE> 18
STATE OF CALIFORNIA )
) ss.
COUNTY OF )
On February ___, 1998, before me, ____________________, personally
appeared __________________________________, personally known to me (or proved
to me on the basis of satisfactory evidence) to be the person(s) whose name(s)
is/are subscribed to the within instrument and acknowledged to me that
he/she/they executed the same in his/her/their authorized capacity(ies), and
that by his/her/their signature(s) on the instrument the person(s), or the
entity upon behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
Signature_________________________
-4-
<PAGE> 19
Schedule 1
LEGAL DESCRIPTION OF BURDENED PROPERTY
-5-
<PAGE> 20
Schedule 2
LEGAL DESCRIPTION OF BENEFITED PROPERTY
-6-
<PAGE> 21
ADDENDUM TO STANDARD OFFER, AGREEMENT AND ESCROW
INSTRUCTIONS FOR PURCHASE OF REAL ESTATE DATED FEBRUARY 3, 1998,
BETWEEN THE SPORTS CLUB COMPANY, INC., AS BUYER, AND RIVERSTONE REALTY
ADVISORS, L.L.C., AS SELLER, FOR THE PROPERTY LOCATED AT INTERSTATE 610,
ROUTE 59 AND MC QUE STREET, HOUSTON, TEXAS
This addendum ("Addendum") modifies, amends and supplements the offer referenced
above (the "Offer"). The Offer and this Addendum are collectively referred
herein as the "Agreement". Capitalized terms not defined herein shall have the
same meaning as set forth in the Offer. In the event of any inconsistency
between the terms of the Offer and this Addendum, the terms of this Addendum
shall prevail.
28. Paragraph 1.1 of the Offer is hereby amended to make The Sports Club
Company, Inc., a Delaware corporation, the "Buyer".
29. Paragraph 2.1 of the Offer is hereby amended (a) to provide that the parties
shall agree upon the legal description of the Property on or before the
expiration of the Due Diligence Period (as defined below) based upon the Survey
and (b) to exclude from the items being purchased by Buyer those described in
Schedule II attached hereto and incorporated herein by this reference. If the
legal description of the Property is not agreed upon on or before the expiration
of the Due Diligence Period, then it shall be agreed upon as soon thereafter as
reasonably possible, as a condition precedent to Closing.
30. Paragraph 3.1 of the Offer is hereby amended to provide that the Purchase
Price shall be an amount equal to the sum of (a) the product of $20 multiplied
by the number of gross square feet contained in the Property, as evidenced by
the ALTA and agreed upon during the Due Diligence Period ("Square Feet"), plus
(b) the Carrying Costs. If the gross square feet contained in the Property is
not agreed upon on or before the expiration of the Due Diligence Period, then it
shall be agreed upon as soon thereafter as reasonably possible, as a condition
precedent to Closing. "Carrying Costs" equal the sum of Interest Cost plus Other
Costs, which terms are themselves defined as follows:
"Interest Cost" = (Land Cost x Interest Rate / 365) x Holding Period.
"Land Cost" = Square Feet x Per Square Foot Cost.
"Per Square Foot Cost" = The lesser of $17 or the actual gross price per
square foot (as determined based upon the Square Feet) paid by Seller
for the Property to the party who sold the Property to Seller, exclusive
of any pro ration adjustments, brokerage commissions, costs of
financing, professional fees, closing costs, due diligence costs, etc.
"Interest Rate" = The lesser of 8% or the stated interest rate set forth
in the promissory note, the proceeds of which Seller used, in whole or
in part, to purchase the Property.
1
<PAGE> 22
"Holding Period" = The number of days from the expiration of the Due
Diligence Period through Closing. (Thus, for example, if the Due
Diligence Period expired on February 20, 1998 and Closing occurred on
June 24, 1998, then the Holding Period would be 124.)
"Other Costs" = Origination Fee + $5,000.
"Origination Fee" = Land Cost times the lesser of 1.5% or the percentage
used to calculate the loan origination fee actually paid by Seller for
the loan, the proceeds of which Seller used, in whole or in part, to
purchase the Property.
31. Paragraphs 4.1 and 4.2 of the Offer are hereby amended to provide that Buyer
shall deposit with Texas Title Company (a) $100,000 of the Deposit upon full
execution of this Agreement by the parties and (b) the remaining $150,000 of the
Deposit on or before Wednesday, March 4, 1998.
32. In paragraph 4.3 of the Offer, the reference to a "state chartered bank" is
hereby deleted; the reference to the "Brokers" is hereby deleted; and it is
hereby agreed that the interest shall accrue to the benefit of the party
entitled thereto, rather than to the benefit "of Buyer".
33. Any reference to counter offers contained in paragraph 8.1 of the Offer or
otherwise in the Offer are hereby deleted.
34. Any reference to a "grant deed" in paragraph 8.3 of the Offer or otherwise
in the Offer is hereby replaced with a reference to a "special warranty deed".
35. All time periods for the satisfaction of various contingencies set forth in
paragraph 9 of the Offer are hereby amended as set forth in paragraph 58 of the
Agreement.
36. Paragraph 9.1(a) of the Offer is hereby deleted in its entirety.
37. Paragraph 9.1(b) of the Offer is hereby deleted in its entirety.
38. Only a material adverse change in the physical condition of the Property
occurring after Tuesday, February 17, 1998 shall constitute a "Material Change"
under paragraph 9.1(m) of the Offer.
39. The last sentence of paragraph 9.1(p) of the Offer is hereby deleted in its
entirety.
40. [Intentionally omitted]
41. Paragraph 9.3 of the Offer is hereby deleted in its entirety.
42. Paragraph 9.4 of the Offer is hereby deleted in its entirety.
43. Paragraph 10.2(a) of the Offer is hereby amended to refer to a "special
warranty deed".
2
<PAGE> 23
44. The representations and warranties of Seller made in paragraph 12 of the
Offer and anywhere else in the Agreement shall survive for two years from and
after the date of Closing.
45. Each reference to Seller's knowledge in paragraphs 12.1(c), 12.1(d),
12.1(f), 12.1(g), 12.1(h), 12.1(i) and 12.1(j) of the Offer is hereby amended to
refer instead to "actual knowledge" "actually known", or words of similar
import, as applicable. In addition, such actual knowledge shall only refer to
the actual knowledge of either Peter Appel or James Wiest.
46. The representation and warranty of Seller contained in paragraph 12.1(c) of
the Offer is hereby amended to refer only to the existence or prior existence on
the Property of any Hazardous Substance in violation of any applicable laws,
rules or regulations or any below ground storage tank.
47. The representation and warranty of Seller contained in paragraph 12.1(g) of
the Offer is hereby amended, in its entirety, as follows: "There are no
unsatisfied mechanic's or materialman's lien rights concerning the Property
arising out of any act or omission by Seller. To Seller's actual knowledge,
there are no unsatisfied mechanic's or materialman's lien rights concerning the
Property arising out of any act or omission of anyone other than Seller."
48. The representation and warranty of Seller contained in paragraph 12.1(h) of
the Offer is hereby amended to refer to any such action, suit or proceeding that
would "materially adversely" affect the Property or the right to occupy or
utilize same.
49. New paragraph 12.1(l) is hereby added to the Offer as follows: "(l) Month to
month tenancy. At Closing, no one shall have a right to occupy all or any part
of the Property, except, if at all, Quality Christmas Tree Co., Inc., a Texas
corporation ("Tenant"), and then only as a month-to-month tenant. Seller shall
take no action regarding Tenant's occupancy of the Property without Buyer's
prior written consent and shall, if requested by Buyer at any time after
expiration of the Due Diligence Period, initiate and prosecute to completion, at
Seller's cost, the termination of Tenant's month-to-month tenancy and the
eviction of Tenant.
50. Paragraph 18.1 of the Offer is hereby deleted in its entirety.
51. Paragraph 18.2 of the Offer is hereby deleted, in its entirety, and replaced
with the following: "Upon the Closing, Broker(s) is/are authorized to publicize
the facts of this transaction, except for the sales price."
52. Paragraph 19 of the Offer is hereby amended to provide that a confirming
copy of any notice given by telecopier shall also be sent by other approved
means as soon as reasonably practicable hereafter.
3
<PAGE> 24
53. Paragraph 21.1 of the Offer is hereby amended and restated to read, in its
entirety, as follows: THE PARTIES AGREE THAT THEY HAVE NEGOTIATED WITH REGARD TO
THE DETERMINATION OF DAMAGES AND HAVE CONCLUDED THAT, IF CLOSING FAILS TO OCCUR,
THEN THE MAXIMUM AMOUNT OF ACTUAL DAMAGES, IF ANY, FOR WHICH BUYER SHALL BE
LIABLE SHALL NOT EXCEED AN AMOUNT EQUAL TO THE PURCHASE PRICE; IT BEING AGREED
THAT, UNDER NO CIRCUMSTANCES, SHALL BUYER BE LIABLE FOR ANY CONSEQUENTIAL
DAMAGES. THE PARTIES HEREBY ACKNOWLEDGE THAT THEY ARE IN EQUAL BARGAINING
POSITIONS, ARE SOPHISTICATED IN BUSINESS MATTERS AND WERE REPRESENTED BY COUNSEL
AT ALL TIMES DURING THE NEGOTIATION OF THIS PROVISION.
MSS PA
----------- -----------
Buyer's Seller's
Initials Initials
54. Subject to paragraph 52, if Buyer or Seller breaches the Agreement, then the
non-breaching party shall be entitled to any and all rights and remedies,
whether pursuant to the Agreement, at law or in equity, including, without
limitation, the right to pursue specific enforcement of this Agreement.
55. Paragraph 22 of the Offer is hereby deleted in its entirety.
56. Paragraph 26.1 of the Offer is hereby deleted, in its entirety, and replaced
with the following: "The Parties and Broker(s) agree that their relationship(s)
shall be governed by applicable Texas law, as summarized in the following
paragraph 26.2. In the event of any inconsistency between paragraph 26.2 and
Texas law, Texas law shall govern."
57. Paragraph 27 of the Offer is hereby amended to refer to the paragraphs of
this Addendum.
58. Paragraph 28.2 of the Offer is hereby deleted, in its entirety, and replaced
with the following: "Seller acknowledges that Broker(s) has/have been retained
to locate a Buyer and is/are the procuring cause of the purchase and sale of the
Property set forth in this Agreement. In consideration of real estate brokerage
service rendered by Broker(s), Seller agrees to pay Broker(s) a real estate
brokerage fee in a sum equal to 4% (1/2 to Riverstone, and 1/2 to Weatherby) of
the purchase price if and only if the sale to Buyer is closed and consummated."
59. The "Due Diligence Period" shall expire upon full execution of this
Agreement by the parties. Such full execution shall evidence that Buyer has
approved, in its sole discretion, all contingencies concerning the Property,
including, without limitation, those contingencies specified in paragraph 9 of
the Offer but excluding and without waiving any matter expressly stated in this
Agreement to be satisfied prior to Closing as a condition to Buyer's obligations
hereunder, and the provisions of this paragraph shall supersede the time periods
and termination rights in paragraph 9 of the Offer. Buyer acknowledges that it
has received from Seller, or itself had previously provided to Seller, those
Seller Documents described in Schedule III attached hereto and incorporated
herein by this reference.
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60. Prior to the execution of this Agreement, Seller shall have delivered to
Buyer, at Seller's expense, copies of any and all documents actually known to
Seller and in Seller's possession (or available to Seller at no expense to
Seller if not in Seller's possession but still known to Seller) which materially
affect the Property (collectively, the "Seller Documents"). The Seller Documents
shall include but not be limited to:
a. All agreements affecting the Property which will remain in effect
subsequent to Closing.
b. All substantive written communications and notices with governing
agencies, public utilities or other public bodies received or sent to, by or on
behalf of Seller.
c. All permits, licenses, certificates of occupancy and any other zoning
documents affecting the Property.
d. The PTR and all Underlying Documents.
e. [Intentionally omitted]
f. Any reports on the Property regarding soils, ground water, survey,
engineering, physical improvement or other studies relating to the Property.
g. The lease with Tenant.
Seller shall not, however, be required to deliver to Buyer any Seller Document
that Seller received, initially, from Buyer.
61. Seller makes the following representations and warranties to Buyer, which
shall be true as of Closing and shall survive Closing:
a. Seller has provided Buyer true, correct and complete copies of all
Seller Documents referenced in Schedule III, and Seller is not required to
provide to Buyer, prior to the execution of this Agreement, any Seller Document
not referenced in Schedule III.
b. To the actual knowledge of Peter Appel and James Weist, there are no
liens, encumbrances, bonds, assessments, leases or tenancies affecting the
Property that shall survive Closing, except those disclosed on Schedule IV.
62. Seller shall indemnify, defend and hold Buyer harmless from and against any
and all cost, expense, liability, damage or demand associated with the Property
occurring for the first time prior to Closing or the breach of any
representation or warranty made by Seller to Buyer.
63. Buyer shall indemnify, defend and hold Seller harmless from and against any
and all cost, expense, liability, damage or demand associated with the Property
occurring for the first time after Closing or the breach of any representation
or warranty made by Buyer to Seller.
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64. Buyer's and Seller's respective rights, duties and obligations under this
Agreement are subject to Seller's acquisition of the Property. If Seller has not
acquired the Property on or before the Expected Closing Date, then this
Agreement shall automatically terminate; the Deposit shall be delivered to
Buyer; and neither party shall have any further liability to the other
hereunder.
65. Buyer shall be entitled to a credit, through Escrow at Closing, against the
Purchase Price in an aggregate amount up to $25,000 for Buyer's third party
professional costs relating to an earlier transaction involving the Property,
upon providing Seller with actual invoices from unrelated third parties for such
costs.
66. Buyer shall reimburse Seller for Seller's third party professional costs
relating to the Property, in an aggregate amount not to exceed $20,000, upon
Seller providing Buyer with actual invoices from unrelated third parties for
such costs. Such costs shall include, without limitation, the costs of a soils
report, the Survey, additional environmental due diligence and any insurance for
environmental liabilities under which Buyer would be an insured.
67. Buyer and Seller have each already reviewed and approved the proposed site
plan and northern property boundary line for the Property, a reduced copy of
which is attached hereto as "Exhibit A" (the "Approved Site Plan"), and have
jointly submitted the same to the appropriate governmental authorities for the
City of Houston, Texas and/or Harris County, Texas. Seller will instruct its
architect, The Steinberg Collaborative, AIA, ("Steinberg"), to invoice Buyer
directly for, and Buyer will pay directly to Steinberg, the cost of Steinberg
having adapted the footprint for Buyer's proposed development at the Property to
the Approved Site Plan in order to make such submission. If Steinberg
nonetheless invoices Seller, then Buyer will pay or reimburse Seller for same.
68. Buyer may cause Closing to occur at any time prior to the Expected Closing
Date, but after the expiration of the Due Diligence Period, upon not less than
10 business days prior written notice to Seller; provided, however, that Buyer
shall have no right to any rental income from the Tenant for any period through
and including May 31, 1998 even if Closing shall occur prior to May 31, 1998.
69. Prior to conveyance of the Property by Seller to Buyer, Seller agrees, at
its sole cost and expense, to subdivide the Development into two "Reserve
tracts" as defined in Section 42-62 of the Code of Ordinances of the City of
Houston (the "City"), one of which Reserve tracts shall consist of the Property
and the other of which shall consist of the Burdened Property pursuant to a
subdivision plat (the "Subdivision Plat") to be prepared in accordance with all
applicable laws, ordinances and requirements of the City, Harris County, and any
other governmental authorities (collectively, "Governmental Authorities") having
jurisdiction over the Property. Seller shall submit a copy of the Subdivision
Plat to Buyer for Buyer's review and approval prior to submitting the
Subdivision Plat for approval by any applicable Governmental Authorities; it
being agreed that the Subdivision Plat shall be prepared in accordance with the
Approved Site Plan. Buyer shall promptly review the
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Subdivision Plat and notify Seller of its approval or disapproval thereof, and
any disapproval shall specify the matter or matters deemed objectionable by
Buyer with respect to the Reserve tract constituting the Property and the
revisions required to make such matters acceptable to Buyer. Upon approval of
the Subdivision Plat by Buyer, Seller shall obtain the approval of the
Subdivision Plat by all applicable Governmental Authorities. If any revisions
are required or if any additional conditions are imposed by applicable
Governmental Authorities for approval of the Subdivision Plat, Buyer shall have
the right to review and approve, in Buyer's reasonable discretion, all of the
same that may have a material adverse affect upon Buyer's anticipated
development of the Property (including, without limitation, the anticipated cost
and timing of such development). As a condition to Buyer's obligation to close,
all approvals (including Buyer's as provided above) necessary for recordation of
the Subdivision Plat shall have been obtained, including the final approval by
the applicable Governmental Authorities for such recordation, such that the only
condition remaining for the effectiveness of the Subdivision Plat shall be the
recordation thereof. Seller shall pay all costs, expenses and fees in connection
with the processing, approval, filing and subsequent recordation of the
Subdivision Plat in the appropriate records of real property of Harris County,
Texas. In no event shall Seller be required to cause the Subdivision Plat to be
filed or become effective prior to the Closing.
70. Attached hereto as Exhibit B and incorporated herein by this reference is
the form of a mutually agreed upon and approved restrictive covenant (the
"Restrictive Covenant") to prohibit the construction, operation or existence, at
any time, upon the property located immediately to the north of the Property and
consisting of approximately 7.0 acres (the "Burdened Property"), or any portion
thereof, any one or more common area "tenant amenity type" fitness facilities,
commercial health clubs, commercial athletic clubs, commercial gyms or any other
type of noncommercial or commercial fitness facilities (including, without
limitation, any aerobic studio, cardiovascular area or indoor basketball or
indoor volleyball court or courts) (collectively, "Facilities") containing, in
the aggregate, more than 1,500 square feet of total floor area under any one or
more roofs. (Thus, for example and without limitation, an apartment building
located on the Burdened Property shall be permitted to have a 1000 square foot
"tenant amenity type" workout area under roof only if such Facility, when added
to the square footage of all other Facilities under roof on the Burdened
Property, does not cause there to be Facilities containing, in the aggregate, in
excess of 1,500 square feet under roof on the Burdened Property.) The legal
description of the Burdened Property shall be agreed upon prior to the
expiration of the Due Diligence Period. At and as a condition to Closing, Seller
covenants to execute, acknowledge and record, through Escrow, the Restrictive
Covenant, the Sign Easement (as defined below) and the Landscaping Agreement (as
defined below) against the Burdened Property so that the Restrictive Covenant,
the Sign Easement and the Landscaping Agreement shall each be prior in right to,
and superior to, the lien of any mortgage or deed of trust encumbering the
Burdened Property at Closing.
71. Attached hereto as Exhibit C and incorporate herein by this reference is the
form of a mutually agreed upon and approved restrictive covenant (the "Other
Restrictive Covenant") to prohibit the construction, operation or existence, at
any time, upon the Property and the Burdened Property, or any portion of either
or both thereof, of any one or more of the uses expressly described therein. At
and as a condition to Closing, Buyer and
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Seller each covenants to execute, acknowledge and record, through Escrow, the
Other Restrictive Covenant and the Landscaping Agreement against the Property
and the Burdened Property so that the Other Restrictive Covenant and the
Landscaping Agreement shall each be prior in right to, and superior to, the lien
of any mortgage or deed of trust encumbering the Property and the Burdened
Property at Closing.
72. Ad valorem and similar taxes and assessments relating to the Property for
the tax year in which the Closing occurs shall be prorated between Seller and
Buyer as of March 1, 1998 (or the date on which Seller acquires title to the
Property, if earlier) in accordance with the following provisions:
(i) If the amount of the actual taxes for the tax year in which
the Closing occurs is available, the proration of such taxes shall be on the
basis of such actual amounts.
(ii) If the amount of the actual taxes for the tax year in which
the Closing occurs is not available, the proration shall be on the basis of the
rate for the preceding calendar year applied to the latest assessed valuation
(or other basis of valuation).
(iii) If the Property has not been separately assessed for the
tax year in which the Closing occurs, the proration shall be on the basis of the
actual or estimated amount of the taxes, as applicable, times a fraction, the
numerator of which is the number of acres in the Property and the denominator of
which is the number of acres in the larger tract of land with which the Property
is assessed for tax purposes.
With respect to all taxes assessed against the Property, if such taxes
are prorated on the basis of estimated amounts, as soon as the amount of such
taxes on the Property for the tax year in which the Closing occurs is assessed,
Seller and Buyer shall readjust the amount of taxes to be paid by each party,
with the result that Seller shall pay for those taxes attributable to the period
of time prior to the Closing Date and Buyer shall pay for those taxes
attributable to the period of time commencing with the Closing Date. Subject to
such readjustment agreement, Buyer shall assume at Closing the payment of ad
valorem taxes for the year in which the Closing occurs. Seller represents and
warrants to Buyer that the taxes assessed against the larger property from which
the Property is to be split (the "Development") have not been determined by any
special appraisal method that allows for appraisal of the land comprising the
Development at less than its market value. Seller shall be liable for any
additional ad valorem taxes and interest and/or penalties that become due for
periods prior to the Closing because of the transfer of the land comprising the
Development or a subsequent change in the use thereof as contemplated by the
Approved Site Plan.
Seller agrees to cause the Property to be separate from the Development
on the tax roles as soon as possible after the Closing. Seller agrees to pay or
cause to be paid prior to delinquency the portion of the ad valorem taxes and
assessments allocable to the portion of the Development (the "Remaining
Development") remaining after the Property has been split from the Development
(the "Taxes Allocable to the Remainder") for each year in which the Property is
assessed with the Remaining Development. In the event the Taxes
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Allocable to the Remainder are not paid prior to delinquency and if as a result
thereof, the lien for taxes and assessments securing the Taxes Allocable to the
Remainder remains against the Property and is not fully discharged, Buyer shall
have the right to pay the same and receive reimbursement therefore from Seller
upon demand. In the event Seller does not reimburse Buyer as herein provided,
Buyer shall have a lien on the Remaining Development to the extent of the amount
unpaid by Seller, its successors or assigns in ownership of all or any part
thereof (each, a "Defaulting Owner"), which amount shall bear interest at
fifteen percent (15%) per annum or the highest rate of interest not prohibited
by law at the time of the expiration of said twenty (20) days, whichever is
less, from the date of expiration of said twenty (20) days until paid. Such lien
may be established as provided by filing a notice claiming a lien (a "Lien
Claim") in the real property records of Harris County, Texas, which Lien Claim
shall include (i) a statement concerning the basis for the Lien Claim and
identifying the lien claimant as a curing party, (ii) an identification of the
Defaulting Owner, (iii) a description of the expenses incurred which has given
rise to the Lien claim and a statement itemizing the amount thereof, and (iv) a
statement that the lien is claimed pursuant to the provisions of this Section.
The lien represented by the Lien Claim shall attach and be effective from the
date the Lien Claim is recorded solely in the amount claimed and may be enforced
or foreclosed by filing a suit to foreclose such lien under the applicable
provisions of the laws of the State of Texas. If the Defaulting Owner against
whom a Lien Claim is filed posts either (x) a bond executed by an approved
corporate surety or (y) an irrevocable letter of credit executed by a national
banking association, which bond or letter of credit (1) names Buyer as the
principal and payee and is in form satisfactory to Buyer, (2) is in the amount
of 1.5 times the claim made in the Lien Claim and (3) unconditionally provides
that it may be drawn upon by Buyer in the event of a final judgment entered by a
court of competent jurisdiction in favor of Buyer, then Buyer shall immediately
record a notice extinguishing the lien and releasing the Lien Claim of record or
take such action as may be reasonably required by a title insurance company
requested to furnish a policy of title insurance on such Parcel deleting the
lien and the Lien Claim as an exception thereto. The Defaulting Owner shall post
the bond or letter of credit by delivering the same to Buyer. All costs and
expenses to obtain the bond or letter of credit, and all costs and expenses
incurred by Buyer required to extinguish the lien and release the Lien Claim
hereunder, shall be borne by the Defaulting Owner. The representations,
warranties, covenants and obligations of the parties contained in this paragraph
shall survive the Closing. At any time before or after Closing, Seller agrees to
execute a memorandum evidencing the existence of the terms and provisions of
this agreement relative to payment of the Taxes Allocable to the Remainder and
the right of Buyer to record Lien Claims against the Remaining Development to be
recorded in the real property records of Harris County, Texas, at or following
Closing, to provide notice to all parties acquiring an interest in the Remaining
Development.
73. The special warranty deed to be delivered by Seller to Buyer pursuant to
Section 10.2(a) of the Offer shall contain covenants of special warranty and be
subject only to those matters contained in Schedule IV and the Survey approved
or deemed approved by Buyer pursuant to the Offer.
74. Pursuant to paragraphs 9.1(f) and 10.1 of the Offer, Seller shall cause, as
a condition to Closing, a current Texas form of owner's title policy (the "Title
Policy") in the
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amount of the Purchase Price promulgated by the Texas State Board of Insurance,
with the survey exception deleted, to be issued, at Seller's expense, to Buyer
at Closing for the Property that, among other things, shall reflect that the
Property is benefitted by the Restrictive Covenant, and that the Restrictive
Covenant has the priority described in paragraph 69. Attached hereto and
incorporated herein by this reference as Schedule IV is Schedule B from a title
commitment for the Property and the Burdened Property with certain changes
marked thereon by hand. As a condition to Closing, the Title Policy shall be
issued so as to comply with such Schedule B and its hand-marked changes.
75. [Intentionally omitted]
76. It shall be a condition precedent to Buyer's obligation to close that Seller
deliver, and Seller covenants to deliver, to Buyer proof, reasonably
satisfactory to Buyer, that the lease, dated September 1, 1987, between the
estate of Gilbert S. Jackson, as landlord, and The Stewart Corporation, as
tenant, as the same may have been amended and covering, in part, the Property,
has been terminated effective on or before the date of Closing.
77. It shall be a condition precedent to Buyer's obligation to close that Seller
deliver, and Seller covenants to deliver, to Buyer, on or before Closing, either
an estoppel certificate for Tenant's lease, reasonably satisfactory to Buyer
(evidencing, without limitation, that such lease is a month-to-month tenancy or
such other term as Buyer has approved in writing) or proof, reasonably
satisfactory to Buyer, that such lease has terminated.
78. Upon prior written notice to the other party, either party may assign its
rights, duties and obligations hereunder to an affiliate that assumes, in
writing, such rights, duties and obligations. Buyer shall not be relieved of any
liability hereunder upon any permitted assignment and assumption, but shall
continue to be liable, jointly and severally with any such assignee, from and
after any such permitted assignment.
79. a. Buyer shall keep confidential the results of any tests and inspections
made by Buyer, and shall not disclose said results to any third parties. WHETHER
OR NOT THE TRANSACTION DESCRIBED IN THIS AGREEMENT SHALL CLOSE, BUYER AGREES TO
INDEMNIFY AND HOLD SELLER HARMLESS FROM ALL CLAIMS, LIABILITIES, DAMAGES AND
CAUSES OF ACTION ARISING OUT OF THE FEASIBILITY STUDY PERFORMED BY BUYER, ITS
AGENTS, INDEPENDENT CONTRACTORS, SERVANTS AND/OR EMPLOYEES, INCLUDING IF DUE TO
THE NEGLIGENCE OF SELLER, ITS AGENTS, INDEPENDENT CONTRACTORS, SERVANTS AND/OR
EMPLOYEES. Buyer further waives and releases any claims, demands, damages,
causes of action or other remedies of any kind whatsoever against Seller for
property damages or bodily and/or personal injuries to Buyer, its agents,
independent contractors, servants and/or employees arising out of the
feasibility study
b. Notwithstanding any other provision of this Agreement, at least three
(3) business days prior to performing any investigation or study of the Property
which will involve the intrusive or destructive sampling or analysis of any
portion of the Property, including, without limitation, any soil, water or
ground water on or under the Property
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("Phase II Investigation"), Buyer shall provide to Seller a detailed written
description of the work to be performed during the Phase II Investigation.
During the three (3) business day period after receipt of Buyer's description,
Seller shall have the right to object to any portion of the proposed Phase II
Investigation, and Buyer shall refrain from performing any such portion which
Seller decides in its sole discretion may represent an unreasonable risk of
injury or damage to persons or property on or near the Property. Seller or its
representatives shall have the right, but not the obligation, to observe any and
all activities of Buyer or its representative during the performance of Phase II
Investigation activities. Seller shall have the right but not the obligation, to
obtain half of any samples which Buyer may obtain during the Phase II
Investigation.
80. a. EXCEPT AS OTHERWISE SPECIFICALLY STATED IN THIS AGREEMENT, SELLER HEREBY
SPECIFICALLY DISCLAIMS ANY WARRANTY, GUARANTY OR REPRESENTATION, ORAL OR
WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, OR CONCERNING (i) THE NATURE AND
CONDITION OF THE PROPERTY, INCLUDING WITHOUT LIMITATION, THE WATER, SOIL AND
GEOLOGY, AND THE SUITABILITY THEREOF AND OF THE PROPERTY FOR ANY AND ALL
ACTIVITIES AND USES WHICH BUYER MAY ELECT TO CONDUCT THEREON, AND THE EXISTENCE
OF ANY ENVIRONMENTAL HAZARDS OR CONDITIONS THEREON OR COMPLIANCE WITH ALL
APPLICABLE LAWS, RULES OR REGULATIONS; (ii) EXCEPT FOR ANY WARRANTIES CONTAINED
IN THE SPECIAL WARRANTY DEED TO BE DELIVERED BY SELLER AT THE CLOSING, THE
NATURE AND EXTENT OF ANY RIGHT-OF-WAY, LEASE, POSSESSION, LIEN, ENCUMBRANCE,
LICENSE, RESERVATION, CONDITION OR OTHERWISE; AND (iii) THE COMPLIANCE OF THE
PROPERTY OR ITS OPERATION WITH ANY LAWS, ORDINANCES OR REGULATIONS OF ANY
GOVERNMENTAL OR OTHER BODY. BUYER ACKNOWLEDGES THAT IT WILL INSPECT THE PROPERTY
AND, EXCEPT AS OTHERWISE SPECIFICALLY STATED IN THIS AGREEMENT, BUYER WILL RELY
SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND NOT ON ANY INFORMATION
PROVIDED OR TO BE PROVIDED BY SELLER. BUYER FURTHER ACKNOWLEDGES THAT THE
INFORMATION PROVIDED AND TO BE PROVIDED WITH RESPECT TO THE PROPERTY WAS
OBTAINED FROM A VARIETY OF SOURCES AND SELLER (x) HAS NOT MADE ANY INDEPENDENT
INVESTIGATION OR VERIFICATION OF SUCH INFORMATION; AND (y) DOES NOT MAKE ANY
REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. THE SALE
OF THE PROPERTY AS PROVIDED FOR HEREIN IS MADE ON AN "AS IS," "WHERE IS" BASIS
AND WITH ALL FAULTS, AND BUYER EXPRESSLY ACKNOWLEDGES THAT, IN CONSIDERATION OF
THE AGREEMENTS OF SELLER HEREIN, EXCEPT AS OTHERWISE SPECIFIED HEREIN, SELLER
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, OR ARISING BY OPERATION
OF LAW, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF CONDITION, HABITABILITY,
MERCHANTABILITY, TENANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, IN RESPECT
OF THE PROPERTY.
b. Except as otherwise specifically stated in this Agreement and the
Special Warranty Deed to be delivered at Closing, Buyer agrees that Seller shall
not be responsible or liable to Buyer for any defects or other conditions
affecting the Property, as Buyer is purchasing the Property AS IS, WHERE IS, and
WITH ALL FAULTS, and subject to the rights of parties in possession of the
Property, if any. Except as otherwise specifically
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stated in this Agreement and the Special Warranty Deed to be delivered at
Closing, Buyer or anyone claiming by, through or under Buyer, hereby fully
releases Seller, its employees, officers, directors, representatives and agents
from any cost, loss, liability, damage, expense, demand, action or cause of
action arising from or related to any defects or other conditions affecting the
Property. Buyer further acknowledges and agrees that this release shall be given
full force and effect according to each of its expressed terms and provisions,
including, but not limited to, those relating to unknown and suspected claims,
damages and causes of action. This covenant releasing Seller shall be a covenant
running with the Property and shall be binding upon Buyer and Buyer's successors
and assigns. Seller hereby assigns without recourse or representation of any
nature to Buyer, effective upon Closing, any and all claims that Seller may have
for any such defects or other conditions affecting the Property. As a material
covenant and condition of this Agreement, Buyer agrees that in the event of any
such cost, loss, liability, damage, expense, demand, action or cause of action
due to such defects or other conditions affecting the Property, Buyer shall look
solely to Seller's predecessors in title for any redress or relief. Except as
otherwise specifically stated in this Agreement and the Special Warranty Deed to
be delivered at Closing, upon the assignment by Seller of its claims, Buyer
releases Seller of all rights, express or implied, Buyer may have against Seller
arising out of or resulting from any defects or other conditions affecting the
Property. Buyer further understands that some of Seller's predecessors in title
may have filed petitions under the federal Bankruptcy Code and Buyer may have no
remedy against such predecessors. This waiver and release of claims shall
survive the Closing.
c. Buyer will execute and deliver to Seller at Closing the Certificate
attached hereto as Schedule 1.
81. This Agreement shall be construed under and in accordance with the laws of
the State of Texas, and all obligations of the parties created hereunder are
performable in Harris County, Texas. Buyer irrevocably agrees that any legal
proceedings in respect of this Agreement or the Property shall be brought in the
District Courts of Harris County, Texas or in the United States District Court
for the Southern District of Texas, Houston Division.
82. The parties may execute this Agreement in one or more identical
counterparts, all of which when taken together will constitute one and the same
instrument.
83. Whenever any determination is to be made or action to be taken on a date
specified in this Agreement, if such date shall fall upon a Saturday, Sunday or
holiday observed by national banks in the State of Texas or California, the date
for such determination or action shall be extended to the first business day
immediately thereafter.
84. At the Closing, if the Property is situated in whole or in part within the
corporate limits of the City of Houston, Texas, Seller and Buyer shall sign and
acknowledge the form of notice of deed restrictions required by Houston City
Ordinance #89-1312, as it may have been amended or superseded from time to time.
85. In accordance with the requirements of the Texas Real Estate License Act,
Buyer is hereby advised by Broker that it should be furnished with or obtain a
policy of title
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insurance or have the abstract covering the Property examined by any attorney of
its own selection.
86. Prior to Closing and subject to applicable law, Seller shall identify a site
on the northeast corner of the Burdened Property, as close as reasonably
possible to the northern boundary line of the Burdened Property, on which Buyer
desires to install a monument sign for the development on the Property of
suitable size so as to be seen by cross traffic on Richmond Avenue. The exact
location of such monument sign, its size, construction, maintenance and all
other matters pertaining thereto shall be subject to the prior reasonable
consent of Seller, as memorialized in an easement agreement (the "Sign
Easement") to be agreed upon by Buyer and Seller, prior to Closing.
87. Prior to Closing, Buyer and Seller shall mutually agree upon a suitable
design for landscaping to be installed on the McQue Avenue side of the Property
and the Burdened Property. On or before Closing, Buyer and Seller shall have
agreed upon the terms of an agreement, to be recorded against both the Burdened
Property and the Property, at Closing, memorializing the agreement regarding
such landscaping (the "Landscaping Agreement") and providing, without
limitation, that each party shall be responsible for repairing, maintaining and
replacing their own landscaping but permitting the other party to repair,
maintain and replace such landscaping, and charge the defaulting party for such
work, if the party initially responsible therefor shall have failed to do so.
88. Buyer and Seller agree that Buyer may install up to two (2) traffic lights
at the intersection of McQue Avenue and Richmond Avenue. Seller shall reimburse
Buyer for one-half of any and all third party costs related to the design,
installation and maintenance of such traffic light(s) promptly upon being
presented with proof, reasonably satisfactory to Seller, of such cost.
89. Any provision of the Agreement which requires observance, performance or
enforcement, after Closing, shall survive 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.
90. Seller agrees to allocate and assign to the Property 235 service units
(which units are calculated on the basis of per day usage) of any wastewater and
water capacity (collectively, "Utility Capacity") currently allocated to the
Development. The Utility Capacity to be transferred by Seller to Buyer shall be
transferred pursuant to an assignment executed by Seller and delivered to Buyer
at Closing in a form acceptable to the City of Houston to cause the transfer
thereof on the City's records. Seller agrees to execute such further documents,
correspondence or other instruments as may reasonably be required by the City or
other governmental authorities to evidence the transfer of such Utility
Capacity, which agreement of Seller shall survive the Closing. The execution and
delivery of the assignment of Utility Capacity by Seller shall be a condition to
Buyer's obligation to close. Buyer shall pay for all connection charges, tap
fees, capital recovery charges and impact fees to implement or preserve the
Utility Capacity allocated to Buyer if and to the extent Buyer wishes to
implement or preserve the same.
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91. Seller acknowledges and agrees that all credits required for flood detention
plus all credits for flood detention impact fees assessed by the Harris County
Flood Control District for the development on the Property of a health club and
related parking structure (or any other development equivalent to a health club
and related parking structure for such purposes) accruing as a result of the
existing impervious surfaces located on the Burdened Property and the Property
shall be allocated solely to the Property. Buyer will not be responsible for any
flood detention requirements, and Seller agrees to be responsible for providing
any required flood detention for both the construction of a health club and
related parking structure on the Property (or any other development equivalent
to a health club and related parking structure for such purposes) and the
Burdened Property, which agreement shall survive the Closing.
92. Seller represents and warrants that its present intent, and its intent at
Closing, is either to construct apartment units on the Burdened Property or to
sell the Burdened Property to a developer of apartment units. Buyer represents
and warrants that its present intent, and its intent at Closing, is to construct
a health club and related parking structure on the Property. The foregoing
representations and warranties shall survive for two years after Closing.
93. a. As a material inducement to Buyer to enter into this Agreement, for a
period of 5 years from and after the Closing neither Riverstone Realty Advisors,
LLC nor any entity controlled by Riverstone Realty Advisors, LLC, nor any entity
controlling Riverstone Realty Advisors, LLC, nor any entity controlled by either
of Peter Appel or James Wiest (collectively, "Restricted Parties") shall have
any interest, direct or indirect and whether as an owner, shareholder, partner,
member, beneficiary, lender, trustee, employee, manager, consultant or
otherwise, or shall engage or participate, directly or indirectly, in any manner
whatsoever in any health or fitness or other similar facility located within a
6-mile radius of the Property, including without limitation in the development,
financing, construction, ownership, management, marketing, or operations of any
such facility and whether as an owner, shareholder, partner, member,
beneficiary, lender, trustee, employee, manager, consultant or otherwise. It
shall not, however, be a breach of this paragraph if any Restricted Party shall
have any interest, direct or indirect and whether as an owner, shareholder,
partner, member, beneficiary, lender, trustee, employee, manager, consultant or
otherwise, or shall engage or participate, directly or indirectly, as aforesaid,
in any health or fitness facility or other similar facility located within (i)
any hotel as an ancillary service for guests of such hotel if, and only if, such
facility does not sell any memberships or the right to use the facility for any
period of time to the general public, or (ii) any apartment complex or
condominium complex as an ancillary service for tenants or condominium owners,
as applicable, of such complex if, and only if, such facility does not sell any
memberships or the right to use the facility for any period of time to the
general public and contains, in the aggregate, less than 1,500 square feet of
total floor area under any one or more roofs.
b. Seller recognizes and agrees that a breach by any Restricted Party of
any of the covenants set forth in this paragraph could cause irreparable harm to
Buyer, that Buyer's remedies at law in the event of such breach would be
inadequate, and that,
14
<PAGE> 35
accordingly, in the event of such breach a restraining order or injunction or
both may be issued against any Restricted Party, in addition to any other rights
and remedies which are available to Buyer. If this paragraph is more restrictive
than permitted by the legal requirements of any jurisdiction in which Buyer
seeks enforcement hereof, then this paragraph shall be limited to the extent
required to permit enforcement thereunder. In particular, the parties intend
that the covenants contained in the preceding portions of this paragraph shall
be construed as a series of separate covenants, one for each county and city
within the radius described above. Except for geographic coverage, each such
separate covenant shall be deemed identical in terms. If, in any judicial
proceeding, a court shall refuse to enforce any of these separate covenants
deemed included in this paragraph, then such unenforceable covenant shall be
deemed eliminated from these provisions for the purpose of those proceedings to
the extent necessary to permit the remaining separate covenants to be enforced.
c. No consideration shall be allocated to the covenants set forth in
this paragraph.
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
THE SPORTS CLUB COMPANY, INC. RIVERSTONE REALTY ADVISORS, L.L.C.
By:__________________________________ By:___________________________________
Its:_________________________________ Its:__________________________________
15
<PAGE> 36
94. If at any time after the Closing and prior to issuance of a Certificate
of Occupancy by the City of Houston, Texas, for a health club of at least 65,000
square feet on the Property, Buyer or any other owner of the Property (the
"Property Owner") desires to sell all or part of the Property to a person or
entity to build or develop rental housing facilities on all or part of the
Property, then the Property Owner shall give written notice thereof (the
"Notice") to the Seller or any other owner of any part of the Burdened Property
(the "Burdened Property Owner"), enclosing a contract for the sale of the
Property executed by the Property Owner (the "Sale Agreement"). The Burdened
Property Owner shall have fifteen (15) days after receipt of the Notice to
notify the Property Owner in writing that it will purchase the Property on the
same terms and conditions set forth in the Sale Agreement with such
modifications as may be necessary to substitute for terms which the Burdened
Property Owner, because of their nature, cannot meet other terms that will
provide substantially the same bargain to the Property Owner. If the Burdened
Property Owner elects to purchase the Property, then the Sale Agreement shall be
terminated and the Burdened Property Owner and the Property Owner shall execute
a sale agreement containing the terms required by this paragraph within ten (10)
days after the Property Owner's receipt of the Burdened Property Owner's
election to purchase the Property. If the Property Owner does not receive a
written notice form the Burdened Property Owner within the said fifteen-day
period, or if a sale agreement is not executed by the Burdened Property Owner
within said ten-day period (other than as a result of default by the Property
owner), then the Burdened Property Owner shall be deemed to have waived its
right to purchase the Property in accordance with the terms of this paragraph.
If the Sale Agreement is not consummated, or is modified to decrease the
purchase price by more than five percent (5%), or to extend the closing date by
more than thirty (30) days, then the Burdened Property Owner will again have the
right to purchase the Property on the new terms, and the Property Owner must
send a new Notice in accordance with the terms hereof. At Closing, a memorandum
setting forth the terms of this right of first refusal shall be executed by
Seller and Buyer and recorded in the Real Property Records of Harris County,
Texas. Such memorandum shall require the parties thereto to release the
memorandum after the right of first refusal has expired.
MSS [SIG]
----------- ------------
Buyer's Initials Seller's Initials
15-A
<PAGE> 37
SCHEDULES:
Schedule I - Certificate
Schedule II - Items Excluded from Sale
Schedule III - Seller Documents Already Provided to or By Seller
Schedule IV - Approved Schedule B to Title Commitment
EXHIBITS:
Exhibit A - Approved Site Plan
Exhibit B - Restrictive Covenant
Exhibit C - Other Restrictive Covenant
16
<PAGE> 38
CERTIFICATE
The undersigned, ______________________ ("Buyer") has this day purchased
from _________________________ ("Seller") that certain real property described
on Exhibit A and all of Seller's right, title, claim and interest in and to any
fixtures and improvements situated thereon (such real property, fixtures and
improvements being herein called the "Property") under and pursuant to the terms
of that certain Standard Offer Agreement and Escrow Instruction for Purchase of
Real Estate dated _____________, 1998 (the "Agreement") between Buyer and
Seller. The Buyer executes this Certificate to confirm and acknowledge that
Buyer has purchased the Property in its AS IS, WHERE IS condition, with all
faults.
(a) EXCEPT AS OTHERWISE SPECIFICALLY STATED IN THE AGREEMENT, SELLER
HEREBY SPECIFICALLY DISCLAIMS ANY WARRANTY, GUARANTY OR REPRESENTATION, ORAL OR
WRITTEN, PAST, PRESENT OR FUTURE, OF, AS TO, OR CONCERNING (i) THE NATURE AND
CONDITION OF THE PROPERTY, INCLUDING WITHOUT LIMITATION, THE WATER, SOIL AND
GEOLOGY, AND THE SUITABILITY THEREOF AND OF THE PROPERTY FOR ANY AND ALL
ACTIVITIES AND USES WHICH BUYER MAY ELECT TO CONDUCT THEREON, AND THE EXISTENCE
OF ANY ENVIRONMENTAL HAZARDS OR CONDITIONS THEREON OR COMPLIANCE WITH ALL
APPLICABLE LAWS, RULES OR REGULATIONS; (ii) EXCEPT FOR ANY WARRANTIES CONTAINED
IN THE SPECIAL WARRANTY DEED TO BE DELIVERED BY SELLER AT THE CLOSING, THE
NATURE AND EXTENT OF ANY RIGHT-OF-WAY, LEASE, POSSESSION, LIEN, ENCUMBRANCE,
LICENSE, RESERVATION, CONDITION OR OTHERWISE; AND (iii) THE COMPLIANCE OF THE
PROPERTY OR ITS OPERATION WITH ANY LAWS, ORDINANCES OR REGULATIONS OF ANY
GOVERNMENTAL OR OTHER BODY. BUYER ACKNOWLEDGES THAT IT WILL INSPECT THE PROPERTY
AND, EXCEPT AS OTHERWISE SPECIFICALLY STATED IN THE AGREEMENT, BUYER WILL RELY
SOLELY ON ITS OWN INVESTIGATION OF THE PROPERTY AND NOT ON ANY INFORMATION
PROVIDED OR TO BE PROVIDED BY SELLER. BUYER FURTHER ACKNOWLEDGES THAT THE
INFORMATION PROVIDED AND TO BE PROVIDED WITH RESPECT TO THE PROPERTY WAS
OBTAINED FROM A VARIETY OF SOURCES AND SELLER (x) HAS NOT MADE ANY INDEPENDENT
INVESTIGATION OR VERIFICATION OF SUCH INFORMATION; AND (y) DOES NOT MAKE ANY
REPRESENTATIONS AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION. THE SALE
OF THE PROPERTY AS PROVIDED FOR HEREIN IS MADE ON AN "AS IS," "WHERE IS" BASIS
AND WITH ALL FAULTS, AND BUYER EXPRESSLY ACKNOWLEDGES THAT, IN CONSIDERATION OF
THE AGREEMENTS OF SELLER HEREIN, EXCEPT AS OTHERWISE SPECIFIED IN THE AGREEMENT,
SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, OR ARISING BY
OPERATION OF LAW, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF CONDITION,
HABITABILITY, MERCHANTABILITY, TENANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, IN RESPECT OF THE PROPERTY.
(b) Except as otherwise specifically stated in this Agreement and the
Special Warranty Deed to be delivered at Closing, Buyer agrees that Seller shall
not be responsible or liable to Buyer for any defects or other conditions
affecting the Property, as Buyer is purchasing the Property AS IS, WHERE IS, and
WITH
17
<PAGE> 39
ALL FAULTS, and subject to the rights of parties in possession of the Property,
if any. Except as otherwise specifically stated in this Agreement and the
Special Warranty Deed to be defined at Closing, Buyer or anyone claiming by,
through or under Buyer, hereby fully releases Seller, its employees, officers,
directors, representatives and agents from any cost, loss, liability, damage,
expense, demand, action or cause of action arising from or related to any
defects or other conditions affecting the Property. Buyer further acknowledges
and agrees that this release shall be given full force and effect according to
each of its expressed terms and provisions, including, but not limited to, those
relating to unknown and suspected claims, damages and causes of action. This
covenant releasing Seller shall be a covenant running with the Property and
shall be binding upon Buyer and Buyer's successors and assigns. Seller hereby
assigns without recourse or representation of any nature to Buyer, effective
upon Closing, any and all claims that Seller may have for any such defects or
other conditions affecting the Property. As a material covenant and condition of
this Agreement, Buyer agrees that in the event of any such cost, loss,
liability, damage, expense, demand, action or cause of action due to such
defects or other conditions affecting the Property, Buyer shall look solely to
Seller's predecessors in title for any redress or relief. Except as otherwise
specifically stated in this Agreement and the Special Warranty Deed to be
delivered at Closing, upon the assignment by Seller of its claims, Buyer
releases Seller of all rights, express or implied, Buyer may have against Seller
arising out of or resulting from any defects or other conditions affecting the
Property. Buyer further understands that some of Seller's predecessors in title
may have filed petitions under the federal Bankruptcy Code and Buyer may have no
remedy against such predecessors. This waiver and release of claims shall
survive the Closing.
Executed this day of ___________________, 1998.
[INSERT SIGNATURE BLOCKS AND NOTARY ACKNOWLEDGMENT]
Exhibit A - Description of the Property
18
<PAGE> 40
SCHEDULE II
ITEMS EXCLUDED FROM SALE
1. The buildings.
2. The metal containers.
3. The light poles.
4 The chain link fencing.
Seller shall have removed, or caused to have been removed, the preceding items
2, 3 and 4 from the Property on or before the Closing unless Tenant's lease,
with Buyer's approval, shall remain in effect after the earlier to occur of May
31, 1998 or Closing.
19
<PAGE> 41
SCHEDULE III
SELLER DOCUMENTS ALREADY
DELIVERED TO OR BY SELLER
- - Environmental Reports
- Subsurface Site Investigation (not dated completed January, 1998)
- T/GE Resources January 15, 1998 Oversight Soils Sampling Report
- Note: Buyer previously had copies of March 12, 1994 Phase I
Environmental and commissioned a 11/19/97 Phase II Environmental
Site Assessment and Preliminary Geotechnical Investigation
- - Larry Milberger February 4, 1998 Engineer Report
- - 1997 Tax Statements
- - Title Commitment for Title Insurance with exceptions
- - All documents with respect to our filing for development plat with the
City of Houston including site plan, survey, updated title commitment
and development plat application
- - Lease Agreement with Quality Christmas Tree Co., Inc., its January 1,
1997 amendment and its December 3, 1997 amendment
- - City of Houston November 10, 1997 Restricted Reservation Letter
- - City of Houston November 10, 1997 Water and Storm Drainage Application
- - February 16, 1998 signed development plat approval notification, and the
approved development plat.
- - Application for Permit to Construct Access Driveway Facilities dated
February 13, 1998
20
<PAGE> 42
SCHEDULE IV
APPROVED SCHEDULE B TO TITLE COMMITMENT
21
<PAGE> 43
Exhibit A
[Approved Site Plan]
22
<PAGE> 44
Exhibit B
[Restrictive Covenant]
23
<PAGE> 45
Exhibit C
[Other Restrictive Covenant]
24
<PAGE> 1
Exhibit 10.85
March 26, 1998
VIA FACSIMILE
- -------------
University Technology Center LP
475 W. Bradley Avenue
El Cajon, California 92020
Attention: Jeff Hamann
John Gibson
Re: University Technology Center Lot 1
----------------------------------
Gentlemen:
This letter is to clarify the agreement to amend that certain Offer to
Purchase, Sale Agreement and Joint Escrow Instructions (the "AGREEMENT"), dated
August 29, 1997, by and between TVE, Inc., a California corporation ("BUYER"),
and University Technology Center LP, a California limited partnership or
Assignee ("SELLER"), as set forth herein. Any term used but not defined herein
shall have the meaning set forth in the Agreement.
1. Pursuant to Section 2.9 of the Agreement, Buyer has deposited into Chicago
Title Company Escrow No. 7358244 - U44 (the "ESCROW"), the sum of $100,000 as
the deposit required by Section 4.1 of the Agreement (the "INITIAL DEPOSIT").
Buyer has until 5:00 pm on Tuesday, November 4, 1997, to authorize the Escrow
Agent to release the Initial Deposit. If Buyer thereby authorizes release of the
Initial Deposit to Seller, notwithstanding the provisions of Section 2.11 or any
other provision of the Agreement, Buyer shall not be required to make any
additional deposits into Escrow. If Buyer does not so authorize release of the
Initial Deposit to Seller on or before 5:00 pm on Tuesday, November 4, 1997,
then Buyer shall be deemed to have given notice of its termination of the
Agreement and its disapproved of the Contingency and the Initial Deposit shall
be returned to Buyer.
2. At Buyer's election, on or before December 12, 1997, Buyer may deposit into
Escrow the sum of $100,000 as a second deposit (the "SECOND DEPOSIT"). Buyer has
until 5:00 pm on Friday, December 12, 1997, to authorize the Escrow Agent to
release the Second Deposit. If Buyer thereby authorizes release of the Second
Deposit to Seller, notwithstanding the provisions of Section 2.11 or any other
provision of the Agreement, Buyer shall not be required to make any additional
deposits into Escrow.
3. At Buyer's election, on or before January 12, 1998, Buyer may elect to
increase the Purchase Price to $6,362,800 by depositing into Escrow, the sum of
$125,000 an addition deposit (the "THIRD DEPOSIT"). Buyer has until 5:00 pm on
Friday, January 12, 1998, to
<PAGE> 2
March 26, 1998
Page 2
authorize the Escrow Agent to release the Third Deposit. If Buyer authorizes
release of the Third Deposit to Seller, Buyer shall be have an extension of the
Closing to April 12, 1998.
4. The defined term "DEPOSIT" as used in the Agreement, shall include,
collectively, the First Deposit, the Second Deposit and the Third Deposit, and
the terms and conditions of the Agreement, including, but not limited to,
Section 4.1 regarding the Deposit, and Section 9.1, regarding liquidated damages
shall apply collectively, to the First Deposit, the Second Deposit and the Third
Deposit.
Please confirm your acceptance and agreement of the foregoing by signing
and returning this letter to me and to Escrow.
Very truly yours,
TVE, Inc.,
a California corporation
By /s/ D. MICHAEL TALLA
--------------------------------
D. Michael Talla
President
Accepted and Agreed as of
November ___, 1997
University Technology Center LP
By Hamann Consolidated, Inc.
a California corporation,
General Partner
By /s/ JEFFREY C. HAMANN
----------------------------------
Its President
---------------------------------
<PAGE> 3
OFFER TO PURCHASE, SALE AGREEMENT
AND JOINT ESCROW INSTRUCTIONS
DATED: SEPTEMBER 2, 1997
FINAL DRAFT FOR SIGNATURE
TVE, INC., A CALIFORNIA CORPORATION
AS "BUYER"
AND
UNIVERSITY TECHNOLOGY CENTER LP
A CALIFORNIA LIMITED PARTNERSHIP
AS "SELLER"
FOR
LOT 1 UNIVERSITY TECHNOLOGY CENTER
<PAGE> 4
OFFER TO PURCHASE, SALE AGREEMENT
AND JOINT ESCROW INSTRUCTIONS
This Offer to Purchase, Sale Agreement and Joint Escrow Instructions
("Agreement") is dated August 29, 1997 by and between TVE, Inc., A California
Corporation as "BUYER", and University Technology Center LP, a California
limited partnership or Assignee, as "SELLER". This Agreement is an offer to
purchase ("Offer") by BUYER, which upon acceptance by SELLER in accordance with
section 1 below, constitutes a legally binding agreement of purchase and sale
between BUYER and SELLER and joint escrow instructions to the Escrow Agent
designated below as follows:
1. SELLER'S ACCEPTANCE. This Agreement constitutes an Offer by
BUYER to purchase the Property described in section 3 below, which Offer shall
remain irrevocable and open for Seller's acceptance on or before 5:00 p.m. Aug.
29, 1997 as set forth above ("Acceptance Period"). Unless SELLER executes a copy
of this Agreement and delivers a copy of this Agreement to BUYER or, if
designated in subsection 2.6 below, Buyer's Broker, before expiration of the
Acceptance Period, such Offer shall be deemed revoked without further notice or
demand from BUYER. Upon timely acceptance by SELLER, this Agreement shall
constitute a legally binding contract pursuant to which SELLER agrees to sell to
BUYER, and BUYER agrees to purchase from SELLER all of Seller's right, title and
interest in and to the Property as more particularly described in section 3
below, for the Purchase Price stated in subsection 2.8 below and otherwise on
the terms and provisions of this Agreement.
2. FUNDAMENTAL TERMS. The provisions in this section 2 are
included to summarize for convenience some of the important terms of this
Agreement, and the provisions in this section are supplemented by and subject to
the other sections of this Agreement. In the event of any conflict between this
section 2 and any other provisions, the other provisions shall supersede and
control.
2.1 PROPERTY IDENTIFICATION. The Property that is the
subject of the purchase and sale transaction provided for in this Agreement
consists of:
Lot 1 University Technology Center
County Tax Assessor Parcel 343-122-25
The total sq. acreage of this parcel is approximately 7.16 acres.
Full legal description shall follow in escrow.
2.2 SELLER'S ADDRESS FOR NOTICE. For purposes of any
notices to SELLER, SELLER's address, telephone and facsimile numbers are:
University Technology Center LP
Attn: Jeff Hamann
475 W. Bradley Avenue
El Cajon, CA 92020
Telephone: (619) 440-7424
Facsimile: (619) 440-8914
2.3 BUYER'S ADDRESS FOR NOTICE. For purposes of any notices
to BUYER, BUYER's address, telephone and facsimile numbers are:
TVE, Inc. A California Corporation
C/O The Sports Club, Co., Inc.
Atten: D. Michael Talia
11100 Santa Monica Blvd.
Suite 300
Los Angeles, CA 90025
Telephone: 310-479-5200
Fax: 310-479-4350
Buyers Attorney: Ron Resch
Resch, Polster, Alpert & Berger LLP
4th Floor
10390 Santa Monica Blvd.
Los Angeles, Ca 90025
Telephone: 310-277-8300
Fax: 310-552-3209
1
<PAGE> 5
2.4 ESCROW AGENT. For purposes of notice and delivery under this
Agreement, the name, address, telephone and facsimile numbers of Escrow Agent
are:
Chicago Title
Attention: Shelva Molm
925 B Street
San Diego, CA 92101
Telephone: (619) 544-6250
Facsimile: (619) 544-6229
2.5 SELLER's Broker. SELLER's Broker is:
CB Commercial Real Estate
Attention: Rick Sparks
Address: 4365 Executive Dr.
San Diego, CA 92121
Telephone: (619) 546-4600
Facsimile: (619) 546-3985
2.6 BUYER's Broker. BUYER's Broker is:
Agent Name: Michael Murphy
Address: 7368 Fay Avenue
La Jolla, CA 92037
Telephone: 619-551-5589
Facsimile: 619-551-2729
2.7 TITLE COMPANY. For purposes of notice and delivery under this
Agreement, the name, address, telephone and facsimile numbers of the Title
Company are:
Chicago Title
Attention: Linda Menasho
925 B Street
San Diego, CA 92101
Telephone: (619) 899-1783
Facsimile: (619) 544-6243
2.8 PURCHASE PRICE. The purchase price ("Purchase Price") of the
Property is $6,237,800, which is payable upon Close of Escrow (as described
below) as provided in subsection 4.2 below.
2.9 DEPOSIT. BUYER has delivered $100,000 as the Deposit required
under subsection 4.1 below. Additional deposit is due upon approval of
contingencies.
2.10 CLOSING DATE. The date for Close of Escrow ("Closing Date")
shall be November 28, 1997, unless BUYER and SELLER mutually agree in writing to
change the Closing Date; provided, however, SELLER shall have the right to
extend the Closing Date as provided in subsection 5.2 and 6.6 below.
2.11 CONTINGENCY EXPIRATION DATE. The Contingency Expiration Date is
October 29 1997, at which time BUYER's entitlement to terminate this Agreement
on account of the exercise of any rights under section 7 below expires. Buyer
shall deposit an additional $200,000 deposit with escrow upon approval of
contingencies.
3. DESCRIPTION OF PROPERTY. The Property to be conveyed by SELLER
includes the land and any land improvements located on the Property described in
subsection 2.1 above. Except as expressly provided in subsections 3.1 below,
the conveyance includes all rights and privileges appurtenant to the Property,
if any, now owned and possessed by SELLER.
3.1 EXCLUSIONS. The Property being conveyed by SELLER does not
include any utility deposits, governmental deposits or any rights to any
refunds arising from facts or circumstances arising prior to the Close of
Escrow, except to the extent that BUYER and SELLER agree in a separate written
agreement to reimburse SELLER for any such prepaid deposits. BUYER, not SELLER,
shall be responsible for the cost of all utility service connections, permits
and extensions.
4. PURCHASE PRICE. The total Purchase Price which BUYER agrees to pay
and SELLER agrees to accept for the Property is the amount set forth in
subsection 2.8 above. The Purchase Price shall be payable through Escrow as
provided in subsections 4.1 and 4.2 below. The Purchase Price shall be payable
in cash or cash equivalent upon Close of Escrow.
2
<PAGE> 6
4.1 INITIAL DEPOSIT. Concurrently with BUYER's delivery of the Offer,
BUYER shall deliver to BUYER's Broker, if one is designated, and if not, to
SELLER's Broker, the Deposit in the amount stated in subsection 2.9 above. The
Deposit shall be in the form of a cashier's or certified check payable to Escrow
Agent. If BUYER has delivered the Deposit to BUYER's Broker, BUYER shall cause
BUYER's Broker to deliver the Deposit to Escrow Agent immediately following
SELLER's execution and delivery of this Agreement to BUYER. If the Deposit has
been delivered to SELLER's Broker, SELLER shall cause SELLER's Broker to deliver
the Deposit to Escrow Agent. The Deposit shall be held in an interest bearing
account at a rate generally available to Escrow Agent on accounts permitting
daily withdrawal, with interest credited to BUYER upon Close of Escrow, or
disbursed to SELLER, if SELLER becomes entitled to receive the Deposit. As more
particularly provided in subsection 9.1 below, the Deposit shall be
non-refundable except: (a) if BUYER has given notice of its election to
terminate this Agreement on or before the Contingency Expiration Date (as
defined in subsection 2.11 above), or, thereafter, pursuant to subsection 6.5 or
section 14; (b) if this Agreement is terminated by SELLER pursuant to any
express right of termination granted to SELLER; or (c) if the Close of Escrow
does not occur on account of the fault of SELLER; (d) Failure of a condition
precedent to closing.
4.2 BALANCE OF PURCHASE PRICE. BUYER shall pay the balance of the
Purchase Price not payable from the Deposit to Escrow Agent no later than one
(1) day prior to the scheduled Closing Date, together with any additional
amounts required to pay costs charged to BUYER. Such amounts shall be deposited
by cashier's check, certified check or wire transfer.
5. ESCROW. SELLER and BUYER hereby agree that the Escrow for this
transaction shall be conducted by the Escrow Agent identified in subsection 2.4
above; provided, however, should such Escrow Agent decline to act, SELLER shall
have the right to designate subject to buyer reasonable such other
institutional escrow company to act as the Escrow Agent. Escrow Agent is
authorized and instructed by BUYER and SELLER that the terms set forth in this
Agreement, which was drawn outside of escrow and handed to Escrow Agent, shall
constitute Escrow Agent's full and complete instructions pertaining to the
sale and purchase of the Property; provided, however, BUYER and SELLER also
agree and adopt, by execution of this Agreement, that certain "Chicago Title,
Escrow Holder General Provisions" annexed to this Agreement as EXHIBIT "1",
except to the extent any such instructions are inconsistent with any express
provisions of this Agreement.
5.1 OPENING OF ESCROW. Immediately after SELLER's execution and
delivery of this Agreement, BUYER and SELLER shall deliver a fully executed copy
of this Agreement to Escrow Agent. Escrow Agent shall acknowledge the opening of
Escrow ("Opening of Escrow") and its agreement to act as Escrow Agent under this
Agreement by: (a) executing the Consent of Escrow Agent where designated below;
and (b) promptly delivering a copy of the executed Consent to SELLER and BUYER.
5.2 CLOSE OF ESCROW. "Close of Escrow" means the date Escrow Agent
records the Deed in favor of BUYER and delivers the Purchase Price to SELLER.
The Closing Date for the Close of Escrow shall be the date specified in
subsection 2.10 above. Except as described in subsection 2.10 above, the Closing
Date shall not otherwise be subject to extension except upon the written
agreement of BUYER and SELLER, in their respective absolute discretion.
5.3 PRORATIONS, ESCROW FEES AND COSTS.
5.3.1 PRORATIONS. The following items shall be prorated in
Escrow, as of the Closing Date, based on the latest information available to
Escrow Agent: all current real property taxes, current, non-delinquent annual
installations of all general and special assessments, current property owners'
association assessments, dues and fees, whether or not such assessments or
charges have been levied as of the Closing Date. All prorations shall be made on
the basis of a 30-day month and a 360-day year. As between BUYER and SELLER, if,
following the Close of Escrow, additional information is available evidencing
that any proration is inaccurate or incomplete, BUYER and SELLER shall directly
adjust such proration.
5.3.2 SELLER'S PAYMENTS. SELLER will pay: (a) documentary
transfer tax (or any other taxes imposed on account of the conveyance of the
Property to BUYER), in the amount Escrow Agent determines to be required by law;
(b) the cost for an Owner's Title Policy described in section 6 below; (c)
one-half of Escrow Agent's escrow fee or escrow cancellation charge; and (d)
other charges and expenses usually payable by a seller in accordance with the
customary practices of Escrow Agent.
5.3.3 BUYER'S PAYMENTS. BUYER will pay: (a) one-half of
Escrow Agent's escrow fee or escrow cancellation charge; (b) the increased cost
of any additional title insurance coverage requested by BUYER; and (c) other
charges and expenses usually payable by a buyer in accordance with the customary
practices of Escrow Agent.
5.4 SELLER'S DELIVERIES. At least one (1) day prior to the scheduled
Closing Date, SELLER shall deliver to Escrow Agent: (a) a grant deed ("Deed") in
the form as shown in EXHIBIT "2" annexed to this Agreement, duly executed and
acknowledged and naming BUYER as the grantee; and (b) properly executed
certificates and affidavits as required under section 11 below.
3
<PAGE> 7
5.5 DISTRIBUTION OF FUNDS AND DOCUMENTS. At the Close of Escrow,
Escrow Agent shall comply with the provisions of subsections 5.5.1 to 5.5.4
below.
5.5.1 PAYMENT OF ENCUMBRANCES. Pay the amount of all existing
liens and encumbrances on the Property to the obligees thereof, other than the
encumbrances permitted to be shown as exceptions to the title, pursuant to
section 6, utilizing funds to which SELLER is entitled upon Close of Escrow and
funds (if any) deposited in Escrow by SELLER.
5.5.2 RECORDATION OF DOCUMENTS. Submit to the appropriate
recorder of San Diego County, California, the Deed for the Property and each
other document to be recorded under the terms of this Agreement or by general
usage and, after recordation, cause the Deed and such other documents to be
delivered to BUYER or such other person acquiring rights thereunder or for
whose benefit such document was recorded.
5.5.3 NON-RECORDED DOCUMENTS. Deliver by United States mail
(or hold for personal pickup, if requested): (i) to BUYER, the Owner's Title
Policy and the Non-Foreign Affidavit referred to below, provided however,
Escrow Agent shall have ten (10) days following the Close of Escrow to deliver
the Owner's Title Policy, and Escrow Agent's disbursement of the Purchase Price
to SELLER shall constitute Escrow Agent's agreement and warranty that such
Owner's Title Policy shall conform to the requirements of the approved title
described in section 6 below; and (ii) each other non-recorded document
received to the payee or person acquiring rights under any such document or
for whose benefit such document was acquired.
5.5.4 APPLICATION/DISBURSEMENT OF FUNDS. Apply all funds
received by Escrow Agent first to the payment of all costs and expenses
otherwise payable by SELLER and BUYER in connection with Escrow, with any
excess funds to be delivered to SELLER or Buyer, as appropriate upon Close of
Escrow.
6. TITLE MATTERS. Upon Close of Escrow, SELLER shall pay for the cost
for the Title Company designated in subsection 2.7 of a standard form
California Land Title Association, standard Owner's Title Insurance Policy
("Owner's Title Policy") insuring title to the Property in BUYER, with coverage
in the amount of the Purchase Price, subject only to: (a) a lien for current
taxes, assessments and property owners' association fees and assessments not
yet payable; (b) any lien for supplemental taxes arising on account of the
conveyance to BUYER and any lien for future District assessments and/or owners'
association assessments; (c) any deed of trust, security instruments or other
instruments granted by BUYER in favor of BUYER's lender; (d) all matters which
would have been revealed by a reasonable visual inspection of the Property; (e)
the Title Company's standard printed exceptions set forth in the Owners's Title
Policy; (f) all items described in the Deed; and (g) such other items of record
approved by BUYER in accordance with the procedures provided in subsections 6.1
through 6.8 below. BUYER shall be responsible for the cost of issuance of any
additional title insurance policy, coverage and/or endorsements, which BUYER,
or BUYER's lender, may request.
6.1 PRELIMINARY TITLE REPORT. Within ten (10) days following the
Opening of Escrow, SELLER shall cause to be delivered to BUYER a preliminary
title report from the Title Company describing all items of record, encumbering
or otherwise, affecting the Property, together with copies of all exceptions to
title shown on the preliminary title report ("Title Report").
6.2 BUYER's APPROVAL. Within ten (10) days following BUYER's receipt
of the Title Report, BUYER may give written notice ("Disapproval Notice") to
SELLER and Escrow Agent if BUYER disapproves or objects to any of the exceptions
or other items shown in the Title Report. BUYER's Disapproval Notice shall also
itemize any and all objections that BUYER may have. If BUYER fails to timely
deliver a Disapproval Notice, BUYER shall be conclusively deemed to have
approved all such exceptions and items shown in the Title Report, and the
requirement for BUYER's approval of title to the Property shall be deemed
satisfied for all purposes; provided, however, this provision providing for
automatic approval shall not constitute BUYER's approval of any deed of trust,
mortgage or other security instrument encumbering the Property, and BUYER shall
be deemed to have automatically disapproved and objected to any such items.
6.3 SELLER's RESPONSE. SELLER shall have ten (10) days from the
receipt of any Disapproval Notice to give BUYER notice of which objections, if
any, SELLER will cause to be eliminated (together with evidence of Sellers'
ability to do so) and any objections that SELLER will not cause to be
eliminated ("SELLER's Response"). If SELLER does not agree to cause an
objection to be eliminated, BUYER shall have a period ten (10) days from
receipt of SELLER's Response, to give notice to SELLER of BUYER's election
either to (a) revoke BUYER's objection and agree to accept the Property subject
to the exception or item previously objected to, or (b) elect to terminate this
Agreement and the Escrow by giving SELLER and Escrow Agent notice of such
election to terminate within ten (10) days from the receipt of SELLER's
Response. If BUYER fails to timely give such termination notice, such right of
termination shall be deemed waived, and BUYER shall be deemed to have revoked
BUYER's objection.
6.4 NEW TITLE EXCEPTION. The phrase "New Title Exception" means an
exception to title not shown in the Title Report and which (a) would, in
BUYER's reasonable judgment, materially interfere with BUYER's proposed use or
enjoyment of the Property, including the ability of BUYER to sell, lease or
finance the Property, or (b) constitutes a lien or other monetary encumbrance
upon the Property. If a New Title Exception arises, BUYER shall have a period
of ten (10) days from the delivery of a supplement to the Title Report
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identifying the New Title Exception to give SELLER notice of BUYER's objection
to the New Title Exception ("BUYER's supplemental Notice"). If BUYER does not
timely deliver BUYER's Supplemental Notice, BUYER shall be conclusively deemed
to have approved the New Title Exception, and agreed to accept the title to the
Property subject to the New Title Exception.
6.4.1 Seller will reserve a private sewer easement across
subject Lot 1 for the benefit of Lot 2. Said sewer will be located in the most
practical location by Seller. Buyer shall have the opportunity to approve of
said location and the terms and conditions of the easement prior to approval of
contingencies.
6.5 OBJECTION/CURE. If a New Title Exception arises and BUYER timely
gives BUYER's Supplemental Notice, SELLER shall promptly commence to use
reasonable efforts, to (a) remove or correct such New Title Exception to
BUYER's reasonable satisfaction, or (b) cause the Title Company to include in
the Owner's Title Policy, insurance covering the New Title Exception. If SELLER
determines that SELLER cannot so correct any New Title Exception, Buyer can
close "as is" or SELLER shall have the right to terminate this Agreement by
giving notice of such termination to BUYER, and Escrow Agent. If SELLER has not
cured such New Title Exception on or before the Closing Date (subject to
extension under subsection 6.6 below), then BUYER may terminate this Agreement
by giving SELLER and Escrow Agent notice of such termination. In the event of
the termination by BUYER or SELLER pursuant to the preceding provision, BUYER
shall be entitled to a refund of the Deposit.
6.6 EXTENSION. SELLER shall have the right to extend the date for
Close of Escrow for a period of up to sixty (60) days in the event a New Title
Exception arises and such extension is reasonably required to correct the new
Title Exception as provided in subsection 6.5 above. SELLER shall give BUYER,
and Escrow Agent written notice of any such extension no later than ten (10)
days after receipt of BUYER's Supplemental Notice.
6.7 REASONABLE APPROVALS. BUYER agrees that whenever BUYER has the
right to approve matters pertaining to the title to the Property to be
conveyed, including any New Title Exception, BUYER shall not unreasonably
withhold the approval.
6.8 DISCLAIMER. Except for SELLER's obligations to cause the
delivery of the Owner's Title Policy in compliance with this section 6, SELLER
is not making any representations or warranties concerning title to the
Property, and SELLER disclaims any implied warranties concerning the impact of
any acts or omissions of SELLER's predecessors-in-interest on the apparent
title to the property.
7. CONDITION OF THE PROPERTY/BUYER'S INVESTIGATION. BUYER's obligation
to purchase the Property is contingent upon BUYER's satisfaction with and
approval of the condition of the Property and its feasibility for such use as
BUYER may determine ("Contingency"). BUYER shall have until the Contingency
Expiration Date stated in subsection 2.11 above to conduct such inspections,
investigations, reviews, audits and evaluations of the condition and
feasibility of the Property, as BUYER desires, including, without limitation,
environmental audits, inspections and investigations concerning any Hazardous
Substances (as defined in subsection 7.3 below) affecting the Property. BUYER
shall have the right to give SELLER and Escrow Agent notice of its election to
terminate this Agreement and Escrow by giving SELLER and Escrow Agent written
notice of such termination on or before the Contingency Expiration Date in the
event BUYER determines that BUYER is not satisfied with the Property, in
BUYER's sole discretion. If BUYER fails to give such notice on or before the
Contingency Expiration Date, BUYER shall be deemed to have approved the Property
for all purposes, all contingencies to BUYER's obligation to purchase the
Property in accordance with this Agreement shall be deemed fully satisfied, and
the Deposit shall be deemed non-refundable as provided in and subject to any
limitations in section 9 below.
7.1 "AS IS" PURCHASE AND SALE. BUYER is purchasing the property "AS
IS" and "where is", subject to all latent and patent defects and deficiencies,
solely in reliance on BUYER's own investigation and evaluation of the Property
as permitted in this section 7, and without any representation or warranty from
SELLER, except for the limited warranties of SELLER described in section 8
below. BUYER acknowledges, represents and agrees that (a) BUYER is aware that
SELLER will have owned the Property for only a brief period of time and has not
undertaken to conduct any specific investigation or evaluation of the condition
of the Property; and (b) BUYER's willingness to undertake its own independent
investigation of the Property and to assume all risks arising from or
concerning the condition of the Property and/or its potential for development,
is a material consideration to SELLER's establishment of the Purchase Price and
SELLER's willingness to enter into this Agreement.
7.2 GOVERNMENTAL REQUIREMENTS. Except with respect to the limited
warranty of SELLER set forth in section 8 below, BUYER specifically
acknowledges that BUYER will be solely responsible for determining and for
compliance with all governmental and legal requirements in connection with its
ownership, use, development or improvement of the Property, and BUYER shall
conduct such studies and investigations as a part of BUYER's general
investigation of the Property prior to the Contingency Expiration Date. Without
limiting the generality of the preceding provision, BUYER specifically
acknowledges that: (a) governmental or utility fees, charges and costs which
may be required to be paid by BUYER in connection with its use, development or
improvement of the Property may include fees, charges and costs attributable to
obligations deferred from the original subdivision of a larger parcel of which
the Property is a part; and (b) BUYER shall be solely responsible
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for determining the physical size, usable area and any and all other physical
attributes or conditions affecting the Property.
7.3 Hazardous Substances. Except with respect to the limited
warranty of SELLER set forth in section 8 below, BUYER specifically
acknowledges, agrees and represents that BUYER's evaluation of the Property
will include such studies, audits and investigations of any environmental
conditions affecting the Property, including the presence of or adverse effect
by any Hazardous Substances in, under or around the Property. The term
"Hazardous Substances" shall be interpreted broadly to include, but not be
limited to, any material or substance that is defined or classified under
federal, state or local laws as: (a) a "hazardous substance" pursuant to
Section 101 of the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. Section 9601(14), Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. Section 1321, as now or hereafter amended; (b)
a "hazardous waste" pursuant to Section 1004 or Section 3001 of the Resource
Conservation and Recovery act, 42 U.S.C. Sections 6903, 6921, as now or
hereafter amended; (c) a toxic pollutant under Section 307(a)(1) of the Federal
Water Pollution Control Act, 33 U.S.C. Section 1317(a)(1); (d) a "hazardous air
pollutant" under Section 112 of the Clean Air Act, 42 U.S.C. Section 7412, as
now or hereafter amended; (e) a "hazardous material" under the Hazardous
Materials Transportation Uniform Safety Act of 1990, 49 U.S.C. App. Section
1802(4), as now or hereafter amended; (f) toxic or hazardous pursuant to
regulations promulgated now or hereafter under the aforementioned laws; or (g)
presenting a risk to human health or the environment under other applicable
federal, state or local laws, ordinances, or regulations, as now in effect or
as may be passed or promulgated in the future. "Hazardous Substances" shall
also mean any substance that after release into the environment and upon
exposure, ingestion, inhalation, or assimilation, either directly from the
environment or directly by ingestion through food chains, will or may
reasonably be anticipated to cause death, disease, behavior abnormalities,
cancer, or genetic abnormalities. "Toxic or Hazardous Substances" specifically
includes, but is not limited to, asbestos, polychlorinated byphenyls ("PCBs"),
petroleum and petroleum-based derivatives, and urea formaldehyde.
7.4 Condition of Soils. Without limiting the general application of
subsection 7.1 above, BUYER specifically acknowledges and agrees that: (a)
BUYER is aware that the natural soil of the Property has been subject to
substantial modification as a result of the addition of substantial quantities
of "fill" and most lots have select non-expansive soils, capped on all or pad
portions, special consideration needs to be made to retain the select material
under buildings; (b) such fill has the potential of causing differential
settlement and/or unstable soils conditions and/or may require specially
designed foundation improvements; (c) SELLER is not making any representation or
warranty concerning such soils conditions; and (d) BUYER will be solely
responsible for conducting such studies and investigations as BUYER may desire
concerning such soils conditions.
7.5 SELLER's Delivery of Information. Subject to the provisions of
subsection 8.2 below, if SELLER has not already done so, within ten (10) days
from the Opening of Escrow, SELLER will deliver to BUYER for informational
purposes only, the studies, instruments, documents and/or reports relative to
the Property. BUYER acknowledges and agrees that most of the studies,
instruments, documents and/or reports were obtained by SELLER from SELLER's
predecessor-in-interest or from other persons, and do not constitute
representations, warranties, agreements and/or opinions of SELLER upon which
BUYER can rely in making a decision whether or not to purchase the Property.
7.6 Access to Property. Between the date of SELLER's acceptance of
this Agreement and the Close of Escrow, SELLER shall allow BUYER and its agents
reasonable access to the Property for the purpose of inspecting, testing and
otherwise evaluating the Property. BUYER agrees that it will pay for the cost
or expense of any repairs or replacements resulting from BUYER's exercise of
the access rights provided in this section, and BUYER shall indemnify, defend
and hold harmless SELLER and the Property from and against any loss, liability,
claim or expense (including reasonable attorneys' fees and court costs) or
damage resulting from BUYER's exercise of such access rights. Without limiting
the generality of this preceding provision, BUYER agrees no destructive or
damaging testing will be permitted except upon SELLER's prior written approval,
which approval shall be conditioned upon BUYER making adequate provisions,
acceptable to SELLER in its sole discretion, for the complete repair of any
such damage or repairs required on account of such testing at BUYER's expense.
SELLER may require, upon reasonable notice to BUYER, that BUYER provide
evidence of adequate general liability insurance coverage from an insurer
acceptable to SELLER and name SELLER as an additional insured under BUYER's
policy, as a condition to BUYER's exercise of such access rights to the
Property.
7.7 BUYER's Studies and Reports. BUYER agrees that BUYER will
provide SELLER, without charge to SELLER, copies of all studies, reports,
plans and analyses obtained or prepared or conducted by or for BUYER concerning
the Property promptly following BUYER's receipt of any such reports, studies,
plans or analyses. BUYER's obligation to provide such documents shall apply
regardless of whether SELLER or BUYER terminates this Agreement pursuant to any
express right of termination, or if for any other reason the transaction
contemplated by this Agreement is not completed. A schedule of all items
referenced above is attached hereto and labeled Exhibit 3. BUYER's execution
hereof acknowledges receipt thereof.
7.7.1 Buyer shall not be obligated to furnish Seller with any
proprietary information related to Health Clubs, anything related to financing,
or any information should Seller default on contract. No representations or
warranties are provided Seller in regard to any information furnished by Buyer.
8. SELLER's Disclaimer/Limitation on Liability. Except for the limited
warranties expressly provided in this section, SELLER is not making any
representation or warranty concerning the physical condition
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of the Property, the feasibility of the use of the Property for any particular
purpose, any governmental rules, regulations or requirements affecting the
Property or any improvement of the Property, and SELLER DISCLAIMS ANY SUCH
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE OF THE PROPERTY BEING CONVEYED
AND/OR ANY AND ALL OTHER EXPRESS OR IMPLIED WARRANTIES WHATSOEVER.
8.1 Hazardous substances. SELLER warrant, to the best of SELLER's
current knowledge and without conducting any specific investigation, that SELLER
has not received actual notice of any existing, pending or threatened
enforcement action or proceeding by any governmental authority under any
applicable federal, state or local law, regulation or ordinance pertaining to
air and water quality, or the handling, transportation, storage, treatment,
usage, or disposal of Hazardous Substances. Except as provided in the preceding
provision, SELLER is not making any representation or warranty whatsoever
concerning the presence in, about or under the Property of any Hazardous
Substances.
8.2 Documents. To the extent that SELLER has provided to BUYER any
documents, instruments, reports or other similar writings or materials
(collectively referred to as "Documents"), which have been drafted or prepared
by third parties, such as environmental consultants, title insurers, architects,
soils engineers, engineers, contractors and/or any governmental authorities,
SELLER warrants that, to the best of SELLER's current knowledge, such Documents
so provided to BUYER are true and accurate copies of the Documents in the
possession of SELLER. Except for the preceding warranty, BUYER acknowledges and
agrees that SELLER is not making any representation or warranty concerning the
accuracy or correctness of the information or conclusions stated in any such
Documents and SELLER shall have no liability to BUYER whatsoever in the event it
is determined that any such Documents are incorrect or inaccurate. BUYER
specifically acknowledges that BUYER is being afforded adequate opportunity to
independently determine the accuracy or correctness of such Documents as a part
of BUYER's investigation of the Property.
8.3 Absence of Adverse Legal Action. To the best of SELLER's current
knowledge, there are no legal actions or proceedings pending against SELLER that
might in any way affect the Property, and there are no pending or threatened
legal actions or proceedings relating to the Property that would adversely
affect the Property.
8.4 SELLER's Current Knowledge. Whenever in this Agreement, the
phrase "to the best of SELLER's current knowledge" is used, such phrase means
and refers only to matters of which Jeffrey C. Hamann ("SELLER's
Representatives") are actually aware, (Representations and warranties of Seller
in this agreement are made as of the date hereof by Seller and Seller shall
notify Buyer if facts change during escrow period) without undertaking any
investigation or inquiry whatsoever other than a review of such documentation in
the immediate possession and control of SELLER's Representative, and shall not
include the knowledge of any other persons or firms, it being understood and
agreed by BUYER that: (a) SELLER's Representative is not individually liable for
any statements or representations made on behalf of SELLER, but is merely the
person whose knowledge is attributed to SELLER; (b) SELLER's Representative was
not involved in the negotiation or execution of contracts relating to the
Property before SELLER's acquisition of the Property; (c) SELLER's
Representative, except as to information actually know to any of them, is not
charged with knowledge of all of the acts and/or omissions of
predecessors-in-title to the Property or management of the Property before
SELLER's acquisition of the Property; ad (d) "SELLER's current knowledge" shall
not include information or material which may be in the possession of SELLER
generally, but of which SELLER's Representative is not actually aware.
8.5 Time Limitation on Action. Notwithstanding any statute or law
permitting a longer period, any legal action or claim concerning or based upon
any representation or warranty of SELLER provided in this Agreement, or implied
in law, shall be commenced no later than one (1) year from the date of Close of
Escrow, and if not so timely commenced, shall be deemed waived.
9. Termination/Cancellation/Remedies. This Agreement shall terminate and
Escrow shall be canceled in the event that BUYER or SELLER exercise any express
right granted in this Agreement to so terminate this Agreement. In addition, in
the event that any requirement or condition for the Close of Escrow is not fully
satisfied or waived in accordance with this Agreement or extensions called for
in this agreement on or before the Closing Date, then this Agreement shall be
subject to termination and Escrow canceled by either party giving written notice
to the other party and Escrow Agent of such cancellation; provided however, in
the event that any such condition or requirement is not so satisfied or waived
on account of the default or failure to perform of any party, then such
termination or cancellation shall not waive or otherwise affect any legal or
equitable remedy of the non-defaulting party on account of such default or
failure to perform, provided such rights and remedies shall be subject to the
limitations set forth in subsections 9.1 to 9.2 below. Except in the event of a
termination of this Agreement on account of the breach or default of SELLER, in
all other events, SELLER's obligation to sell the Property to BUYER shall
immediately cease and terminate upon the termination of this Agreement. Buyer's
obligation to purchase the Property is subject to and contingent upon the
satisfaction of all of the conditions set forth herein. Upon the exercise of any
right by Buyer to terminate this Agreement, the Deposit shall be refunded to
Buyer.
<PAGE> 11
9.1 DEFAULT BY BUYER/LIQUIDATED DAMAGES. IF THE CLOSE OF ESCROW DOES
NOT TIMELY OCCUR BY REASON OF ANY DEFAULT OR FAILURE TO PERFORM BY BUYER AND ALL
CONDITIONS TO BUYERS PERFORMANCE HAVING BEEN WAIVED OR SATISFIED AND SELLER IS
NOT IN DEFAULT, BUYER AND SELLER AGREE THAT IT WOULD BE IMPRACTICAL AND
EXTREMELY DIFFICULT TO ESTIMATE THE DAMAGES WHICH SELLER MAY SUFFER. THEREFORE,
BUYER AND SELLER AGREE THAT THE AMOUNT OF BUYER'S DEPOSIT REPRESENTS A FAIR AND
REASONABLE ESTIMATE OF SELLER'S DAMAGES UNDER THE PROVISIONS OF SECTIONS
1671, 1676 AND 1677 OF THE CALIFORNIA CIVIL CODE, AND THAT SELLER SHALL BE
ENTITLED TO RECEIVE AND RETAIN THE DEPOSIT ON ACCOUNT OF BUYER'S DEFAULT IN
ADDITION TO ANY OTHER RIGHTS OR REMEDIES OF SELLER ARISING ON ACCOUNT OF SUCH
DEFAULT.
/s/ DMT
----------------- ----------------
SELLER's Initials BUYER's Initials
Notwithstanding the preceding provision, BUYER agrees that SELLER's entitlement
to retain the Deposit as liquidated damages is intended to compensate SELLER
only for damage arising from the failure of BUYER to timely purchase the
Property in accordance with this Agreement, and neither the existence of nor
enforcement by SELLER of such remedy shall restrict or prejudice SELLER's rights
or remedies to: (a) recover of attorneys' fees and legal expenses in the event
that BUYER objects to or otherwise impedes the release of the Deposit by Escrow
Agent to SELLER in the event of BUYER's default; (b) enforce any indemnification
obligations of BUYER provided for in this Agreement or as a matter of law; (c)
commence an action to enforce the restriction on BUYER's recordation of a lis
pendens in violation of subsection 9.2 below.
9.2 DEFAULT BY SELLER. In the event of a default by SELLER, BUYER
shall receive a refund of the Deposit and shall be entitled either to (a) pursue
the specific performance of the conveyance of the Property pursuant to this
Agreement, or (b) recover its out-of-pocket damages, provided in no event shall
SELLER be liable for consequential or incidental damages. In all events, the
liability of SELLER with respect to any defaults by SELLER shall be limited to
SELLER's interest in the Property and following the Close of Escrow, the sale
proceeds.
10. REAL ESTATE COMMISSION. In the event the Close of Escrow occurs in
accordance with this Agreement, SELLER authorizes Escrow Agent to pay real
estate commissions from the proceeds of the Purchase Price deposited in Escrow
to SELLER's Broker, and, if applicable, to BUYER's Broker, in accordance with
separate supplement instructions to Escrow Agent signed and approved solely by
SELLER. Except for BUYER's Broker, BUYER represents and warrants that it has not
been represented by a real estate broker or other person and has incurred no
liability for any brokerage commission or finder's fee arising from or relating
to the transactions contemplated by this Agreement which could give rise to a
claim against SELLER. BUYER does hereby agree to indemnify, and covenants and
agrees to protect, defend and hold harmless SELLER from and against all
liability, cost, damage or expense, including, but not by way of limitation,
reasonable attorneys' fee, on account of any brokerage commission or finder's
fee arising from any act or omission of BUYER which is claimed to be due as a
result of the sale of the Property to BUYER. Commission has been agreed between
brokers that sellers broker shall receive 75% of the commission paid, buyers
broker shall receive 25%.
10.1 PRINCIPAL LICENSE DISCLOSURE. BUYER acknowledges that SELLER has
disclosed to BUYER that one or more partners, members, officers, directors or
shareholders of SELLER or affiliates of SELLER are licensed in California as
real estate brokers.
11. SELLER's TAX CERTIFICATIONS. Prior to Close of Escrow, SELLER shall
deliver to Escrow Agent (with a copy to BUYER) the following certifications: (a)
an affidavit, executed and sworn to under penalty of perjury, that SELLER is not
a foreign person and is a United States Person, as defined in Section
7701(a)(30) of the Internal Revenue Code of 1986, as amended ("Code") and in a
form in compliance with the Code; and (b) a certification, executed and sworn to
under penalty of perjury, that SELLER is domiciled in or has its principal place
of business in California, and, therefore, this transaction is exempt from
withholding tax under California Revenue and Taxation Code Sections 18805, and
26131.
12. NOTICE. Except as otherwise provided herein, any notice or other
items to be delivered to a party pursuant to this Agreement shall be in writing
and either personally delivered, sent by first class mail (alone or in
combination with a facsimile transmittal), postage prepaid, addressed to the
party to be notified at the address specified in accordance with this section,
or delivered by Federal Express or other comparable overnight delivery service,
delivery costs prepaid and addressed to the party to be notified at the address
specified in accordance with this section. Any such notice or other items to be
delivered shall be deemed duly given, delivered and received on the date of
personal delivery to the party (or such party's authorized representative) or in
the case of mailing three (3) business days after deposit in the U.S. Mail, or,
in the case of Federal Express or other comparable overnight delivery service,
one (1) business day following the delivery of such notice or item to such
delivery service, as the case may be; provided, however, in the case a party
transmits such notice or item by facsimile transmission to a facsimile number
designated above together with the separate mailing of the original, then such
notice shall be deemed delivered one (1) day following the date of the
facsimile transmission. Unless a party changes its address or facsimile number
for notice by giving a notice in accordance with this section changing such
address or
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facsimile number, the address or facsimile number for notice and delivery of
each party shall be as set forth in section 2 above.
13. POSSESSION. Subject to any matters approved by BUYER pursuant
to section 6 above, possession of the Property shall be delivered by
SELLER to BUYER concurrently with the Close of Escrow.
14. DAMAGE, DESTRUCTION, DETERIORATION MATERIAL ADVERSE CHANGE OR
CONDEMNATION. If, prior to Close of Escrow, the Property is destroyed or
materially damaged or suffers material deterioration, or there is a material
adverse change, or condemnation proceedings are threatened or commenced against
the Property, BUYER shall have the right, exercisable by giving notice of such
decision to the other party within ten (10) days of such damage, destruction,
deterioration or condemnation proceedings, to terminate this Agreement. If
Buyer does not elect to terminate this Agreement and if BUYER elects to accept
the Property in its then condition as of Close of Escrow, any proceeds of
insurance, if any, payable on account of such damage or destruction or
condemnation awards otherwise payable to SELLER by reason of such damage,
destruction or condemnation shall be paid or assigned to BUYER upon Close of
Escrow, Seller shall notify Buyer if any of the following events occur prior to
the Closing Date: (I) any litigation, claim or notice against or involving the
Property or Seller, which questions the validity of this Agreement, or any
instrument, document or agreement contemplated under this Agreement; or (ii)
any material adverse change in the condition (financial or otherwise) of the
Property.
15. HEADINGS. The captions and paragraph headings used in this
Agreement are inserted for convenience of reference only and are not intended
to define, limit or affect the interpretation or construction of any term or
provision hereof.
16. EXHIBITS. All exhibits referred to herein are attached hereto
and incorporated by reference.
17. COUNTERPARTS. This Agreement or any escrow instructions
pursuant to this Agreement may be executed in multiple copies, each of which
shall be deemed an original.
18. ENTIRE AGREEMENT. This Agreement together with all exhibits
attached hereto and other agreements expressly referred to herein, constitutes
the entire agreement between the parties with respect to the purchase and sale
of the Property. All prior or contemporaneous agreements, understandings,
representations, warranties and statements, oral or written, are superseded.
19. ASSIGNMENT. BUYER may assign its rights under this Agreement
and the Escrow to any entity or person owned or controlled by BUYER, upon
written notice to SELLER and Escrow Agent, provided (a) the assignee assumes
all the obligations of BUYER under this Agreement and the Escrow, (b) no such
assignment shall release or relieve BUYER from its obligations under this
Agreement, (c) no such assignment shall change, delay or otherwise affect the
Contingency Expiration Date, the Closing Date or any other time periods for
BUYER's performance under this Agreement, (d) no such assignment shall
reinstate any rights or entitlements waived by BUYER prior to such assignment,
and (e) any such assignment shall be conclusively presumed to include an
assignment of any right of BUYER to receive the Deposit if subject to refund in
accordance with this Agreement.
20. SUCCESSORS. All terms of this Agreement shall be binding upon,
inure to the benefit of, and be enforceable by the parties hereto and their
respective heirs, legal representatives, successors and assigns.
21. ATTORNEYS' FEES. If either party commences legal proceedings
(including any Arbitration) for any relief against the other party arising out
of this Agreement, the losing party shall pay the prevailing party's legal
costs and expenses, including, but not limited to, reasonable attorneys' fees,
and reasonable expert witness fees as determined by the court or arbitrator.
22. TIME IS OF THE ESSENCE. Time is of the essence in the
performance and satisfaction of each of the covenants, conditions and
requirements stated in this Agreement. All time periods provided in this
Agreement shall be strictly observed, and shall not be subject to extension or
delay except as expressly permitted by any provision of this Agreement.
23. FACSIMILE TRANSMISSIONS. A facsimile transmission of the
executed signatured page from this Agreement, or any other documents to be
delivered in accordance with this Agreement, shall constitute due and proper
execution of such document, and any party making such facsimile transmission
will be deemed to have agreed to deliver a copy of such document bearing the
original signature of such party no later than three (3) days following the
date of the facsimile transmission.
24. PROTECTION OF AFFILIATES. Whenever in this Agreement a party
is obligated to indemnify, defend and/or hold harmless another party, such
obligation to provide indemnification shall be deemed to include
indemnification of the officers, directors, shareholders, partners, members and
agents of the party entitled to indemnification, who are expressly declared to
be third party beneficiaries of this Agreement for purposes of the enforcement
of such indemnification rights.
9
<PAGE> 13
25. ALTERNATE AGREEMENTS. Notwithstanding SELLER's execution of this
Agreement, SELLER shall have the right to back up offers for the Property.
SELLER shall have the right to seek and enter into contingent agreements for
the sale of the Property to third parties, so long as any such agreement is
expressly contingent upon BUYER not completing the purchase of the Property as
contemplated in this Agreement.
25.1 CONFIDENTIALITY. Seller shall not publicly disclose the contents
of this transaction, except to the extent required of sellers banker and similar
as necessary relations, who in turn agrees to keep similarly confidential.
25.2 Seller will notify Buyer is a "back up" offer is received.
25.3 Seller will cease marketing subject property at such time as
buyer approves the contingencies.
26. SURVIVAL OF REPRESENTATIONS AND COVENANTS. All agreements,
representations and warranties made by either party, and all covenants not to
be fully performed by Close of Escrow, including any obligation to provide
indemnification, shall survive Close of Escrow and remain in effect and shall
not be merged by delivery of the Deed. Any representations and/or obligation to
provide indemnification shall survive the termination of this Agreement.
26.1 Buyer's obligation to purchase the Property is contingent upon
all of the representations and warranties contained herein being true and
correct as of their respective dates and as of the Closing Date as if made on
such dates. Seller shall provide Buyer with a certificate of Seller, dated as of
the Closing Date, certifying that Seller's warranties and representations set
forth herein continue to be true, correct and in force as of such date. Seller
shall promptly notify Buyer if Seller becomes aware of the existence of any fact
or circumstance which makes untrue or misleading any of the statements or
information contained herein.
27. REPRESENTATION OF AUTHORITY. In the event that a party to this
Agreement is a legal entity, such as a corporation, partnership, limited
liability company or trust, the individual(s) executing this Agreement on
behalf of such party shall, as a result of such execution, be deemed to
represent and warrant that such person(s) has the authority to cause such party
to enter into this Agreement as a legally binding contract by execution of this
Agreement.
28. INTERPRETATION. Each party acknowledges that the terms of this
Agreement have been negotiated and that any rule of construction or
interpretation of a written document against the draftsperson shall not apply
to the interpretation or application of this Agreement. If any provision of
this Agreement is determined, by a court of competent jurisdiction to be
illegal or unenforceable, such provision shall be deemed to be several and
deleted, and neither such provision, its severance nor deletion shall affect
the validity of the remaining provisions of this Agreement.
29. ARBITRATION OF DISPUTES. Except as provided in subsection 29.2
below, in the event of any disagreement or dispute between the BUYER and SELLER
arising prior to the Close of Escrow, either party shall be entitled to have
such dispute or disagreement determined by binding arbitration in accordance
with the procedure provided in this section ("Arbitration"). Any Arbitration
permitted pursuant to this section shall be commenced and conducted in
accordance with the California Code of Civil Procedure, Section 1281, et. seq.,
and the discovery procedures permitted by Section 1283.05 of the Code of Civil
Procedure shall apply. The Arbitration award rendered shall be final and binding
and judgment may be entered upon it in accordance with applicable laws by any
court having jurisdiction thereof. The costs of the Arbitration shall be paid
by the parties equally, provided the prevailing party shall be entitled to an
award against the other party of any costs paid or incurred by such prevailing
party in such Arbitration in addition to all other relief awarded. The
Arbitrator shall be a retired Superior Court Judge selected by the Presiding
Judge of the Superior Court of the County in which the Escrow is pending, or a
judge designated to act by the Presiding Judge.
29.1 ARBITRATION PROCEDURE. BY INITIALING IN THE SPACE BELOW, YOU
ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE
ABOVE STATED "ARBITRATION OF DISPUTES" PROVISION DECIDED BY A NEUTRAL
ARBITRATION AS PROVIDED BY CALIFORNIA LAW, AND YOU ARE GIVING UP ANY RIGHTS YOU
MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY
INITIALING IN THE SPACE BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO
DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE
"ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY. THE UNDERSIGNED HAVE READ AND UNDERSTAND THE
FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN
THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION.
[INITIALS]
SELLER's Initials BUYER's Initials
10
<PAGE> 14
29.2 Exclusions from Arbitration. Notwithstanding any other
provision, the following matters are excluded from the Arbitration agreement(a)
a judicial or non-judicial foreclosure or any other action or proceeding to
enforce a deed of trust, mortgage or other security device encumbering the
Property, (b) an action for bodily injury or wrongful death; (c) any provisional
remedies such as attachment, injunction, receivership, and the filing of a
judicial action to enable such a provisional remedy to be obtained shall not
constitute a waiver of the agreement to submit certain disputes to Arbitration;
or (d) any action to expunge any lis pendens or otherwise eliminate any notice
recorded or filed in violation of subsection 9.2 above and/or any action for
damages or other relief arising from such violation.
<PAGE> 15
IN WITNESS WHEREOF, BUYER and SELLER have executed this Agreement to be
effective as of the date of SELLER's acceptance designated below.
/s/ D. MICHAEL TALLA
-------------------------------
TVE, Inc.
A California Corporation
By: /s/ D. MICHAEL TALLA
------------------------------
Dated: September , 1997 D. Michael Talla, President
"SELLER"
University Technology Center LP
a California limited partnership
By: HAMANN CONSOLIDATED, INC.
a California corporation, general partner
Dated: September , 1997 By: /s/ Jeffrey C. Hamann
--------------------------------
Jeffrey C. Hamann, President
Dated: September 4, 1997 By: /s/ Gregg Hamann
--------------------------------
Gregg Hamann, Secretary
CONSENT OF ESCROW AGENT
The undersigned ("Escrow Agent") hereby agrees (1) to accept the foregoing
Agreement, and (2) to be bound by said Agreement in the performance of its
duties as Escrow Agent subject to Chicago Title's Cover Instructions and General
Provisions.
This Consent is executed on September 10, 1997, which shall constitute the
"Opening of Escrow" pursuant to subsection 5.1 of the Agreement.
The Escrow No. is .
"ESCROW AGENT"
CHICAGO TITLE
By: /s/ SHELVA J. MOLIN
-----------------------------
Shelva J. Molin
Sr. Escrow Officer
<PAGE> 16
CHICAGO TITLE
ESCROW HOLDER GENERAL PROVISIONS
<PAGE> 1
EXHIBIT 23.1
CONSENT OF KPMG PEAT MARWICK LLP
Board of Directors
The Sports Club Company, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
March 30, 1998
