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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended DECEMBER 31, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act for the transition period from _______to_______.
COMMISSION FILE NUMBER: 1-13290
THE SPORTS CLUB COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 95-4479735
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
11100 Santa Monica Blvd., Suite 300
Los Angeles, California 90025
(Address of registrant's principal executive offices) (Zip Code)
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Registrant's telephone number, including area code:
(310) 479-5200
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Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered
Title of each class
Common Stock $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 15, 2000 was $24,018,728.
The number of shares of the Common Stock, par value $ .01 per share, outstanding
(the only class of Common Stock of the registrant outstanding) was 17,731,753 on
March 15, 2000.
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PART I
ITEM 1. BUSINESS
GENERAL
We were organized in 1994 to consolidate the ownership of several sports
and fitness clubs ("Clubs"). We currently operate five Clubs, under the "Sports
Club" name, including The Sports Club/LA in Los Angeles, The Sports Club/LA in
New York at Rockefeller Center, The Sports Club/Irvine, The Sports Club/Las
Vegas and Reebok Sports Club/NY. Our Clubs offer a wide range of fitness and
recreation options and amenities, and are marketed to affluent, health conscious
individuals who desire a service oriented state-of-the-art club. Our Clubs are
widely recognized as being among the finest sports and fitness clubs in the
country.
Our Clubs are conveniently located in spacious, modern facilities that
typically include fitness centers, swimming pools and basketball courts. Our
Clubs are designed as "urban country clubs," and range in size from 90,000 to
140,000 square feet. Initiation fees and monthly membership dues at Sports Clubs
are higher than those charged by most other sports and fitness clubs, which we
believe do not provide comparable services. Income from ancillary services
and products, including private training, food and beverages, spa services and
sports boutiques, also contribute a significant portion of our revenues. Our
subsidiary, The SportsMed Company ("SportsMed"), operates physical therapy
facilities in some Clubs.
Prior to December 1999, we also owned and operated the Spectrum Clubs.
These Clubs are typically housed in 25,000 to 65,000 square foot facilities and
offer many amenities similar to but less extensive than our Sports Clubs.
Initiation fees and monthly dues at Spectrum Clubs are lower than at Sports
Clubs. In December 1999, we sold the Spectrum Clubs to an investment group and
realized $60.4 million of gross proceeds from the sale. We continue to manage
the Spectrum Clubs under a transition services agreement with the buyer and will
continue to do so until the buyer establishes their administrative offices later
in the year 2000.
Our strategy is to expand The Sports Club/LA brand in major metropolitan
markets and to increase revenues and profitability at existing Clubs, through
regular increases in monthly membership dues and expanded ancillary services and
products. There are currently four The Sports Club/LA Clubs under development
in New York City, Washington, D.C., San Francisco and Boston. We expect to open
these Clubs from mid 2000 through mid 2001. We own 3.5 acres of undeveloped land
in Houston, Texas on which we expect to develop an approximately 85,000 square
foot Sports Club. We will continue to investigate other sites for new Club
developments and acquisitions.
According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, 22.5 million Americans
were members of more than 14,100 sports and fitness clubs in 1999. Revenues
generated by the United States sports and fitness club industry increased at a
compound annual rate of 8.3% from $5.5 billion in 1991 to $9.6 billion in 1998.
The industry has benefited from the general public's increasing awareness of the
importance of physical exercise. Among other groups, we target members age 35
and older who, according to IHRSA, represent 50% of all memberships and are the
fastest growing segment of the industry.
THE SPORTS CLUBS
Sports Clubs are 90,000 to 140,000 square foot multi-purpose facilities,
which generally include the following features:
o large, fully equipped gyms with state-of-the-art fitness
equipment, including weight training, cardio-vascular
equipment and flexibility/balance centers,
o basketball, volleyball, racquetball, squash and paddle tennis
courts and, in the case of The Sports Club/Las Vegas, indoor
and outdoor tennis courts,
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o aerobics/group exercise studios featuring classes throughout the
day and evening, seven days a week, including aerobics, dance,
muscle conditioning, boxing, martial arts and bodymind,
o group cycling studios and, in the case of Reebok Sports Club/NY,
climbing walls,
o swimming pools, sun decks, golf practice nets and running
tracks,
o destination cityspa offering massage, facials and full body
treatments,
o men's and women's locker rooms featuring wood lockers,
o steam rooms, saunas and jacuzzis,
o restaurants, sports bars, private dining/conference rooms, media
centers and sundecks,
o valet parking, pro shops, hair salons and childcare services,
o sports medicine and physical therapy facilities,
o personal trainers to develop and supervise members' exercise
routines,
o registered dietitians,
o fitlab assessment center,
o PTS Private Training System nutritional programs and products,
o registered dietitians for nutritional consultations,
o interactive children's classes, as well as supervised
age-specific junior recreational rooms and junior programs such
as gymnastics,
o instruction in racquet sports, golf, running, swimming, boxing,
martial arts, and, in the case of Reebok Sports Club/NY, rock
climbing,
o full-time activities directors responsible for social and media
events for members, including organizing trips, lectures and
charity events,
o full-time sports managers who organize sports tournaments,
leagues and classes, and
o wellness protocols such as exercise regimens designed for
specific groups of members.
We currently have five Sports Clubs in operation. The Sports Club/LA
opened in 1987 in west Los Angeles, California, near the affluent communities of
Santa Monica, Brentwood, Beverly Hills, Pacific Palisades, Westwood and Century
City. The Sports Club/Irvine opened in 1990 near Newport Beach in Orange County,
California. Reebok Sports Club/NY opened in 1995 in Manhattan's upper west side,
and was developed in partnership with a subsidiary of Reebok International, Ltd.
("Reebok") and Lincoln Metrocenter Partners, L.P. (collectively with its
affiliates "Millennium"). We manage the operations of this Club and own a
controlling 60% interest in the partnership that owns this Club. Reebok and
Millennium have each retained an interest in the partnership. We acquired a club
in Henderson, Nevada and converted it to The Sports Club/Las Vegas in August
1997. The Sports Club/Las Vegas services the rapidly growing Las Vegas market
and is situated approximately three miles east of the Las Vegas airport. Our
newest Club, New York's The Sports Club/LA is located within the Rockefeller
Center complex and was opened in February 2000. This Club was designed to
service the executive business community in mid-town Manhattan.
THE SPORTSMED COMPANY, INC.
Our SportsMed subsidiary operates physical therapy facilities within The
Sports Club/LA in Los Angeles, The Sports Club/Irvine, the Spectrum Club --
Agoura Hills, and the Spectrum Club -- Valencia. SportsMed also operates in a
stand alone facility in Calabasas, California. The clinics are staffed by
exercise physiologists, physical therapists and registered dietitians who
provide services to members and
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others. We believe that SportsMed provides valuable services which are
complementary to the other services provided by the Clubs, and are considering
expanding the SportsMed concept to other Clubs in the future.
DEVELOPMENT OF ADDITIONAL CLUBS
Current Sports Club Developments. The following outlines our current
development plans for Sports Clubs.
The Sports Club/LA-Upper East Side, New York. This 140,000 square foot
Club is located in the upper east side of Manhattan and is expected to be open
in the third quarter of 2000. This site is the location of the former Vertical
Club, which was closed in February 1999 for major renovation and conversion to a
Sports Club.
Millennium Developments. We are developing The Sports Club/LA in Boston,
Washington, D.C. and San Francisco with Millennium, with whom we developed
Reebok Sports Club/NY. Millennium is a developer of premier multi-use projects,
and is funded by Quantum Realty Fund, a member of the Quantum Group of Funds,
which are off-shore investment funds managed by Soros Fund Management, a
management firm headed by George Soros. These Clubs will be located in projects
developed by Millennium in prime, metropolitan locations which, like Reebok
Sports Club/NY, include commercial, retail, entertainment and residential space.
In addition, each of these developments is expected to include either a Ritz
Carlton or Four Seasons five star hotel. These Clubs will be approximately
100,000 square feet and will offer services typically found at our other Sports
Club sites. We expect to open these Clubs between September 2000 and April 2001.
We believe that such projects offer ideal locations for Sports Clubs and intend
to investigate additional Sports Club developments with Millennium or other
developers in other major metropolitan areas.
The Sports Club/LA-Houston. In June 1998, we acquired approximately 3.5
acres of undeveloped land in Houston, Texas, on which we expect to develop an
approximately 85,000 square foot Sports Club. At the current time, we are not
actively developing this property.
Other Developments. We currently believe that our resources can be best
used to develop The Sports Club/LA in additional locations, but we may consider
the acquisition and conversion of existing sports and fitness clubs to a Sports
Club/LA if a suitable opportunity arises. We believe that, because of our
established reputation and the prestige associated with the Sports Clubs,
developers view our Clubs as valuable components of multi-use developments.
Performance of Newly Developed and Acquired Clubs. Based on our
experience, a newly developed Club tends to achieve significant increases in
revenues until a mature membership level is reached. In the past, recently
opened Clubs which have not yet achieved mature membership levels 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. We expect this trend to continue at the five
Clubs we will open in 2000 and 2001 as the current presale membership levels are
below the amount required to reach a break even operating level. The
demographics in the vicinity of our newly opened Sports Club/LA at Rockefeller
Center and the upper east side Club under development compare favorably to the
demographics at Reebok Sports Club/NY. Therefore, we believe that our income
from these Clubs will significantly increase as membership levels mature.
The physical layout, decor, age of equipment, staff training, marketing
programs, membership fees, ancillary services offered and other characteristics
of Clubs we may acquire vary, and, as a result, acquired Clubs may have lower
operating income than a typical Sports Club. We generally will renovate an
acquired Club, upgrade equipment, fitness programs and exercise protocols,
install experienced employees, implement marketing and training programs, and
introduce new services and products to enhance ancillary revenues. We will also
implement membership fees consistent with other Sports Clubs. Newly acquired
Clubs undergoing such improvements may perform at lower margins during the
period of implementation of new policies and programs.
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SALES AND MARKETING
Strategy. The Sports Clubs are marketed as "urban country clubs"
offering personalized attention and multiple amenities and services. We believe
that the image of The Sports Clubs as the leader in the sports and fitness
industry justifies charging a premium. Our members include professionals, sports
and entertainment personalities and business people. Our Sports Clubs emphasize
personalized service and instruction and the creation of an "urban country club"
atmosphere in which members can relax and socialize. Our marketing efforts at
older, more seasoned Sports Clubs emphasize maintaining existing members,
replacing members who leave with new members and increasing ancillary revenues
such as private training and retail sales. Our focus at the newer Sports Clubs
is on attracting additional members.
Referrals, Endorsements and Advertising. Word-of-mouth referrals and
endorsements by existing members are the Sports Clubs' most important source of
new members. In addition, all Sports Clubs utilize targeted marketing programs
which include advertisements, promotions, public relations and community events.
The principal marketing media for the Clubs are direct mail with some use of
print advertisements. The print advertisements are supplemented by special
events and special membership programs. The Sports Clubs host corporate parties
and charity benefits and often donate free or discounted memberships to
charitable organizations. We also conduct periodic membership drives whereby
referring members are entitled to receive special gifts and other incentives. We
believe that we will be able to continue to utilize these marketing strategies
in the promotion of new Clubs.
Targeted Members. The largest segment of the membership base for the
Sports Clubs consists of health-conscious individuals. We target five other
groups in order to expand membership: corporate members, "shape-over" members,
medical referrals, families, and seniors. Each of these groups requires
specialized exercise/fitness programs, and we have developed specific programs
to attract members of these groups.
Corporate Programs. We believe the corporate market is a significant
source of new members, due to the proximity of the Sports Clubs to business
centers and the use of the Clubs to conduct business and to develop and maintain
business contacts. We employ several Corporate Membership Directors whose
principal responsibilities are to solicit corporate memberships from businesses
operating in the vicinity of our Clubs. The Sports Clubs offer corporate
group-discounted initiation fees depending upon the number of new members
involved. Our SportsMed subsidiary has developed several corporate wellness
programs to fit the needs of this particular market. We believe that
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.
Medical Referrals. We target members from the medical referral market
through our SportsMed subsidiary by offering specific rehabilitation and
exercise protocols to complement other forms of physical therapy recommended by
a physician or medical group.
Family Programs. We believe that 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, we have implemented "Fun N Fit" programs which target
children between the ages of 6 months and 15 years and involve youth sports
camps and clinicks, fitness programs, art classes and birthday parties. The
Clubs' weight-training, basketball and swimming pool facilities are made
available to children and their parents during family day, and
specially-designed movement classes utilizing a variety of fitness equipment are
offered to younger children. The Clubs offer a summer sports camp, provide
individualized sports
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instruction and offer multiple fitness activities such as gymnastics, martial
arts and dance that are age appropriate.
Senior Programs. We anticipate that as the current core membership group
ages, we will meet the changing fitness needs of seniors and attract additional
members from the senior population. We maintain training and exercise protocol
manuals for the senior market (which we generally define 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. We believe this market will expand as the "baby boomers"
mature.
EMPLOYEE TRAINING
We believe that a key component of our operating strategy is a
well-trained and knowledgeable staff. We have comprehensive training programs to
enhance the effectiveness of our personnel. All newly-hired employees are
required to attend an orientation seminar, which is led by members of our
management and a personnel instructor. Topics include member service and member
interaction skills, our history and philosophy, and safety issues. These
orientation seminars are held throughout the year.
To aid in the development and continuing education of management
employees, we offer a workshop entitled "Introduction to 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, generally consisting of five three-hour sessions, are held six times a
year or as needed for new employees, and our management personnel are required
to attend periodically to maintain their skills.
We provide 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. We
place particular emphasis on 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. Our
fitness instructors are trained to assist in the sales function and to implement
fitness testing and individually-tailored exercise programs. Most instructors
are college-educated. Our aerobics instructors hold a nationally recognized
certification and 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.
MEMBERSHIP PROGRAMS
Sports Club memberships require an initiation fee plus monthly
membership dues. Unlike many other clubs, we do not offer financing for
memberships. Members are currently required to pay their dues on a monthly basis
by EFT, by which each member is automatically debited each month for dues either
through a checking account or credit card. At established Sports Clubs, the
average life of a member is four to five years.
Sports Clubs offer three types of memberships: executive, health and
racquet. Sports Club initiation fees and monthly membership dues vary depending
on the location of the Club. The Sports Clubs' initiation fees range from $400
to $2,500 and monthly membership dues range from $90 to $225. Corporate,
bicoastal and spousal memberships are also available.
Executive Membership. Executive membership offers the greatest number of
amenities and services, including unlimited use of all facilities, racquet
sports privileges, personal locker assignments
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within an executive locker room, laundry service, free valet parking and charge
privileges for dining and other Club services. Executive membership entitles a
member to use all Sports Clubs.
Health Membership. Health membership is the basic membership offering
unlimited use of the facility excluding those privileges associated with a
racquet membership; courts are available to holders of health memberships for an
additional fee. We also offer a bi-coastal membership which entitles a member to
use all Sports Clubs throughout the country.
Racquet Membership. 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.
COMPETITION
Although the sports and fitness industry is still fragmented, the
industry has experienced significant consolidation in recent years and certain
of our competitors are significantly larger and have greater financial and
operating resources than we do. In addition, a number of individual and regional
operators compete with us in our existing and targeted markets. Many of these
sports and fitness clubs attract the same types of members we target. We also
compete 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. As the general public
becomes increasingly aware of the benefits of regular exercise, it is
anticipated that additional sports and fitness businesses will emerge. We
believe that there will continue to exist a market for our Clubs and that our
operating experience, our highly visible image, the professionalism of our staff
and our state-of-the-art equipment and exercise facilities afford us an
advantage over our competitors. However, we may be unable to maintain our
membership fees or membership levels in areas where another sports and fitness
club offers competitive facilities and services at a lower cost to members.
TRADEMARKS AND TRADENAMES
The "Sports Club" name is generally not protectable under federal or
state trademark laws. We have registered our "flying lady" logo as a stand-alone
design and in combination with "The Sports Club/LA" and "The Sports Club/Irvine"
names under federal trademark laws. We have also registered "The Sports Club/LA"
name and logo in France, Germany, the United Kingdom, Japan and Australia and we
are awaiting final trademark approval under a common mark for the "European
Community" in general.
GOVERNMENT REGULATION
Our operations and business practices are subject to regulation at the
federal, state and, in some cases, local levels. State and local consumer
protection laws and regulations govern our 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 we
currently operate Clubs. Many other states into which we 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, we are 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. We maintain internal review
procedures in order to comply with these requirements, and subject to the
matters described in "Item 3 Legal Proceedings," believe that our activities
are in substantial compliance with all applicable statutes, rules and decisions.
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Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to 10 days (depending on the
applicable state law) and, in such event, is entitled to a refund of any down
payment. In addition, our membership contracts provide that a member may cancel
his or her membership at any time upon death, disability or relocation of a
certain distance from the nearest Club. The specific procedures for cancellation
in these circumstances vary due to differing state laws. In each instance, the
canceling member is entitled to a refund of prepaid amounts only. Furthermore,
where permitted by law, a cancellation fee is due to us upon cancellation and we
may offset such amount against any refunds owed.
EMPLOYEES
At March 15, 2000, we had approximately 1,600 employees, most of whom
are employed on a part-time basis in Club operating activities such as aerobics,
private training and food and beverage services. At March 15, 2000 we employed
approximately 700 full-time employees, approximately 150 of whom were sales
personnel or supervisory personnel involved in Club operations, and
approximately 50 of whom were in general and administrative functions. We are
not a party to any collective bargaining agreement with our employees. Although
we experience high turnover of non-management personnel, we have never
experienced any labor shortages nor had any difficulty in obtaining adequate
replacements for departing employees. We consider our relations with our
employees to be good.
ITEM 2. PROPERTIES
We own The Sports Club/Irvine, The Sports Club/LA in Los Angeles
(subject to a minority interest held by D. Michael Talla) and The Sports
Club/Las Vegas including all underlying real estate. We own land in Houston,
Texas on which we plan to develop a Sports Club. All other structures in which
the Clubs are located are leased.
The following table provides certain information concerning our Clubs:
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APPROXIMATE OPEN DATE OWN OR LEASE
CLUB SQUARE FEET (3) EXPIRATION DATE RENEWAL OPTION
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The Sports Club/LA-Los Angeles (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 4/17/15 Three 14-year options
The Sports Club/Las Vegas............... 136,000 1997 A Own N/A
The Sports Club/LA - Rockefeller Center 90,000 2000 O 1/31/13 Two 5-year options
The Sports Club/LA - 61st Street........ 140,000 2000 E 12/31/20 Two 5-year options
The Sports Club/LA - Washington D.C..... 100,000 2000 E 2020 (4) Three 14-year options
The Sports Club/LA - Boston............. 100,000 2001 E 2021 (4) Three 14-year options
The Sports Club/LA - San Francisco...... 100,000 2001 E 2021 (4) Three 14-year options
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(1) D. Michael Talla, our Chairman and Co 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 in Los Angeles. See "Certain Relationships and
Related Transactions."
(2) We are entitled to certain priority distributions from the partnership
which owns this Club. After payment of such priority distributions, we
are 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) Date of acquisition ("A"), opening ("O") or estimated opening date
("E").
(4) The initial term for each lease expires 20 years after the rent
commencement date, as defined in the lease.
We remain obligated under lease agreements for seven of our former
Spectrum Club locations. We have subleased each of these properties to the buyer
of these Clubs under sublease agreements which
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provide that all operating costs of these facilities be assumed by the new
owners. We also own the land and building at the former Spectrum Club - Fountain
Valley and are leasing that property to another club operator.
All of the Clubs maintain comprehensive casualty, liability and business
interruption insurance and Clubs located in California maintain a blanket $40.0
million earthquake insurance policy. We believe that our insurance coverage is
in accordance with or above industry standards. There are, however, certain
types of losses which may be either uninsurable or not economically insurable,
and insurance proceeds may not adequately compensate for all economic
consequences of any loss. Should a loss occur, we could lose both our invested
capital and our anticipated profits from the affected Clubs. Any such event
could have a material adverse effect on our operations.
ITEM 3. LEGAL PROCEEDINGS
MKDG/Rhodes SC Partnership and Sports Club, Inc. v. Agricultural
Insurance Company (Los Angeles Superior Court). At the time of the Northridge
earthquake on January 17, 1994, Agricultural Insurance Company ("Agricultural")
provided certain excess earthquake coverage for The Sports Club/LA in Los
Angeles. Certain of our predecessors (the "SCLA Parties") were named insureds
under the policy. The Partners assigned to MKDG/Rhodes SC Partnership ("MKDG")
all of their rights to payments under the policy and retained no interest in any
amounts paid by Agricultural. A dispute arose under the policy and MKDG filed a
complaint against Agricultural, 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 sought the return of amounts paid
(approximately $3.0 million), plus punitive damages and attorneys fees. This
matter was settled in December 1999 without any material expense to us.
OTR v. Spectrum Club Liquidation, Inc. and The Sports Club Company, Inc.
(Orange County Superior Court). OTR and Spectrum Club Liquidation, Inc. ("SCLI")
entered into a lease with respect to a proposed Spectrum Club development site
in Anaheim Hills, California, and we guaranteed SCLI's obligations under the
lease. SCLI sought to rescind the lease, and OTR brought this action for damages
against SCLI for breach of the lease and against us on the guarantee, seeking
specific damages and unspecified general damages. We filed a cross-complaint
seeking rescission of the lease on the basis of fraud, mistake and negligent
misrepresentation. In November 1999, the parties settled both actions and we
paid OTR $2,950,000. We agreed to this settlement concurrent with the sale of
the Spectrum Clubs. As a result, the settlement payment was recorded as a
reduction in the gain on the Spectrum Clubs sale.
Randy Pinkerton and Nick Thedes, individually and as Partners of Think
Physical Therapy v. SCC California, Inc. (Orange County Superior Court). On
April 23, 1999, Randy Pinkerton and Nick Thedes, individually and as partners of
Think Therapy Physical Therapy (collectively, "Think Therapy") filed an action
against SCC California, Inc., ("Spectrum"), our wholly-owned subsidiary,
alleging among other things, breach of contract and interference with economic
relationships. The complaint seeks declaratory relief (including the
confirmation of Think Therapy's lease term through December 1999), unspecified
compensatory damages and attorneys' fees. The contract which Think Therapy
alleges was breached relates to a lease at the former Spectrum Club - Santa Ana
facility ("Santa Ana Club") which facility was acquired by Spectrum in December
1997 and sold in April 1999 as commercial property unrelated to the sports and
fitness business. We believe that Think Therapy was on a month-to-month lease
and in connection with the sale of the Santa Ana Club we terminated their
tenancy by serving a thirty day Notice to Quit in March 1999. Spectrum has
responded to the complaint against them and believes the allegations are without
merit and will vigorously defend this lawsuit.
Lyudmirsky and those similarly situated v. Sports Club, Inc. of
California; LA/Irvine Sports Club, Ltd. (Los Angeles Superior Court). On June
25, 1999, Ilya Lyudmirsky ("Lyudmirsky") filed a class action lawsuit against
Sports Club, Inc. of California and LA/Irvine Sports Club, Ltd. (collectively,
the "Company") alleging, among other things, violations of California Civil Code
Section 1812.80 et seq., claiming our membership fee structure and membership
contracts violate certain provisions of the Health
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Studio Services Act (the "HSS Act"). Lyudmirsky further alleges violations of
the Unruh Act and the Consumer Legal Remedies Act, claiming we give unlawful,
preferential discounts to attractive women and advertises membership fees which
are higher than fees actually charged to some members. The complaint seeks
equitable relief, (including a temporary and permanent injunction), unspecified
compensatory damages, punitive damages and attorneys' fees. We stipulated to a
preliminary injunction, which prohibits us from violating the HSS Act, effective
as of November 29, 1999. On October 22, 1999, the Court ruled that Lyudmirsky's
membership contract violated the HSS Act and is void. However, the Court has not
ruled that Lyudmirsky suffered damages as a result of the violation of the HSS
Act. Under the HSS Act, a claimant may recover an amount up to three times the
actual damages suffered plus attorneys' fees. The amount of actual damages is
measured by the amount paid less reasonable value of services. We believe our
initiation fees and monthly dues are reasonable, and our members have not
suffered actual damages as a result of the alleged violation of the HSS Act. The
hearing on Lyudmirsky's motion for class certification regarding the HSS Act
claim is set for March 29, 2000. We have denied violating the Unruh Act, and
providing preferential discounts to women based on beauty. We have also denied
making misleading or false statements regarding our pricing structure or
discounts. We are in the process of evaluating Lyudmirsky's damage claim as well
as the size of the class which may be certified with respect to the HSS claim
and are unable at this time to estimate the damages, if any, which any class may
be awarded. However, if a significantly large class is certified and the court
or jury accepts plaintiff's damage claims, this action may have a materially
adverse effect on our financial condition. The trial date is August 7, 2000.
Park Place Entertainment Corporation v. The Sports Club Company, Inc.
(Los Angeles Superior Court). On December 23, 1999, Park Place Entertainment
Corporation ("Park Place") filed an action against us for money due on a
promissory note. Park Place is the current holder of a purchase money promissory
note in the amount of $2,666,666 (the "Note") given to Hilton Hotels Corporation
("Hilton") in connection with our 1998 acquisition of the Vertical Club - a
sports and fitness club located in New York (the "Club"). We believe that we
have various claims in connection with the repair and refurbishing of the Club
which offset the money owed on the Note. Park Place feels that no basis exists
which excuses us from the timely payment of installments on the Note and is
asking for damages in the amount of $2,666,666 plus interest, attorneys' fees
and costs of the suit. On February 25, 2000, we filed an answer raising offsets
and a cross-complaint against Hilton seeking damages in the amount of
$14,415,000 for alleged breach of contract, fraud and negligent
misrepresentation, plus interest, attorneys' fees and costs of suit. Hilton has
not yet responded. We are just commencing discovery and intend to vigorously
pursue our cross-claims. We are unable to estimate, at this time, the amount, if
any, that will be awarded in this matter.
Other Matters. We are also involved in various claims and lawsuits
incidental to our business, including claims arising from accidents. However, in
the opinion of management, we are 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 our financial
condition, cash flow or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Not applicable
10
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
Our Common Stock is traded on the American Stock Exchange ("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>
CALENDAR QUARTER PRICE RANGE OF COMMON STOCK
---------------------------
HIGH LOW
------ ------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter ........................ $9.250 $8.250
Second Quarter ....................... 9.250 6.750
Third Quarter ........................ 7.500 4.750
Fourth Quarter ....................... 6.063 3.750
Year Ended December 31, 1999:
First Quarter ........................ 5.250 3.750
Second Quarter ....................... 5.125 3.812
Third Quarter ........................ 6.000 3.937
Fourth Quarter ....................... 5.000 3.125
Year Ended December 31, 2000:
First Quarter (through March 15, 2000) 4.500 3.375
</TABLE>
As of March 15, 2000 we had approximately 59 stockholders of record and
approximately 400 nonobjecting beneficial owners. The closing price of our
Common Stock as reported by the AMEX on March 15, 2000, was $4.125.
DIVIDEND POLICY
We have never declared or paid any dividends on our Common Stock and we
do not anticipate doing so in the foreseeable future. It is our present policy
to retain earnings for use in our operations and the expansion of our business.
In addition, our ability to pay cash dividends is limited by our current
financing agreements and may be similarly limited by future financing
agreements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents our summary financial and operating data
for the fiscal years ended December 31, 1995 through 1999 and have been derived
from our consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants. The summary financial and operating
data should be read in conjunction with, and is qualified in its entirety by
reference to, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
thereto appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues .................................................. $ 34,659 $ 36,918 $ 61,154 $ 81,923 $ 87,325
Operating expenses:
Direct .................................................. 21,730 22,989 43,517 56,746 60,528
Selling, general and administrative ..................... 5,486 6,052 6,607 8,556 9,234
Depreciation and amortization ........................... 2,775 2,490 3,919 5,282 6,147
Pre-opening expenses ..................................... -- -- -- -- 3,090
-------- -------- -------- -------- --------
Total operating expenses ........................... 29,991 31,531 54,043 70,584 78,999
-------- -------- -------- -------- --------
Income from operations ............................. 4,668 5,387 7,111 11,339 8,326
Other income (expense):
Interest ................................................ (2,600) (2,682) (3,206) (1,629) (5,991)
Minority interests ...................................... (150) (150) (22) (150) (150)
Equity interest in net income of unconsolidated
subsidiaries ........................................... 860 631 696 880 931
Non-recurring items ..................................... -- (300) (2,025) (314) 553
-------- -------- -------- -------- --------
Total other income (expense) ....................... (1,890) (2,501) (4,557) (1,213) (4,657)
-------- -------- -------- -------- --------
Income before income taxes, extraordinary charge and
cumulative effect of change in accounting
principle .......................................... 2,778 2,886 2,554 10,126 3,669
Provision for income taxes ................................ 1,139 1,183 1,014 3,971 1,460
-------- -------- -------- -------- --------
Income before extraordinary charge and cumulative
effect of change in accounting principle .......... 1,639 1,703 1,540 6,155 2,209
Extraordinary charge from early extinguishment
of debt, net of income tax benefit of $1,331 ............. -- -- -- 2,173 --
Cumulative effect of change in accounting principle,
net of income tax benefit of $600 ........................ -- -- -- -- 899
-------- -------- -------- -------- --------
Net income ......................................... $ 1,639 $ 1,703 $ 1,540 $ 3,982 $ 1,310
======== ======== ======== ======== ========
Net income per share:
Basic ................................................... $ 0.14 $ 0.15 $ 0.12 $ 0.21 $ 0.07
======== ======== ======== ======== ========
Diluted ................................................. $ 0.14 $ 0.15 $ 0.12 $ 0.21 $ 0.07
======== ======== ======== ======== ========
Weighted average number of common shares outstanding:
Basic ................................................... 11,353 11,355 12,524 18,603 18,114
======== ======== ======== ======== ========
Diluted(1) .............................................. 11,357 11,360 12,683 18,829 18,290
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments . $ 1,545 $ 4,146 $ 1,581 $ 2,233 $ 77,496
Current assets .................................... 7,147 7,341 4,926 7,043 83,341
Property and equipment, net ....................... 59,956 72,736 106,791 135,269 118,959
Total assets ...................................... 83,161 95,697 131,561 163,757 223,553
Deferred membership revenue ....................... 5,614 7,481 9,936 9,953 9,712
Current liabilities ............................... 11,355 14,159 26,844 26,199 23,833
Long-term debt including current installments ..... 32,913 38,497 50,798 37,441 103,887
Stockholders' equity .............................. 39,492 41,202 58,477 104,539 97,687
</TABLE>
- ----------
(1) Does not include up to 119,093 shares to be issued as consideration for
the acquisition of one Spectrum Club acquired from Racquetball World.
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<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto appearing elsewhere herein.
The Spectrum Club -- Manhattan Beach was accounted for under the equity method
of accounting until December 1999 at which time we sold all of our Spectrum
Clubs.
In July 1997, we opened the Spectrum Club -- Valencia. In August 1997,
we acquired a sports and fitness club in Henderson, Nevada which we converted to
The Sports Club/Las Vegas in a transaction accounted for as a purchase. On
December 31, 1997, we acquired four Clubs in Southern California, which were
operated as Spectrum Clubs in a transaction accounted for as a purchase; one of
these Clubs was leased to another health and fitness operator in January 1999
and one Club was sold in April 1999. In November 1998 we closed the Spectrum
Club -- Santa Monica and in December 1999 sold the remaining Spectrum Clubs.
Seasonal factors have not had a significant effect on our operating results.
RESULTS OF OPERATIONS
As a result of the sale of the Spectrum Clubs in November 1999, results
for past periods are not indicative of results in future periods.
Fiscal 1999. Our revenues for the year ended December 31, 1999, were
$87.3 million, compared to $81.9 million for 1998, an increase of $5.4 million
or 6.6%. Revenue increased at the Spectrum Clubs by $1.4 million, as the
revenues at our two new Clubs offset the lost revenues at Clubs we sold or
closed. Revenue increased by $4.0 million at The Sports Clubs and SportsMed.
The revenue increase at The Sports Clubs was primarily due to increases in
membership dues and ancillary services fees and the final maturation of the
membership base at The Reebok Sports Club/NY.
Our direct operating expenses increased to $60.5 million for the year
ended December 31, 1999, compared to $56.7 million for 1998. Direct expenses
increased primarily due to the opening of two new Spectrum Clubs in 1999 and to
direct expenses related to increased revenues at The Sports Clubs. Direct
operating expenses as a percentage of revenues were 69.3% in both 1999 and 1998.
Selling, general and administrative expenses were $9.2 million for the
year ended December 31, 1999, compared to $8.6 million for 1998, an increase of
$600,000 or 7.9%. Selling costs increased approximately $70,000. General and
administrative costs increased by approximately $600,000. General and
administrative costs increased primarily due to legal expenses associated with
litigation (See "Item 3 - Legal Proceedings") and the increase in our corporate
infrastructure related to our planned expansion. Selling, general and
administrative costs slightly increased as a percentage of revenue to 10.6% in
1999 from 10.4% in 1998. We believe these costs should decrease as a percentage
of future revenues as we expand and achieve economies of scale. There is no
assurance, however, that said expansion or economies of scale will be achieved.
Depreciation and amortization expenses were $6.1 million for the year
ended December 31, 1999, compared to $5.3 million for 1998. Depreciation expense
increased primarily due to the opening of two new Spectrum Clubs in 1999 and to
additional depreciation related to improvements made at other Clubs in 1998 and
1999.
Pre-opening expenses incurred in 1999 were $3.1 million. We adopted
Statement of Position 98-5, "Accounting for Start-Up Costs" ("SOP 98-5")
effective January 1, 1999. SOP 98-5 provides that all costs related to the
development of new fitness clubs, except for real estate related costs, be
expensed as incurred. This is a change from our previous accounting policy,
whereby many of these costs were capitalized and charged to expense upon the
Club opening. In 1999, we incurred start up costs at two Spectrum Clubs and two
Sports Clubs.
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<PAGE> 14
Interest expense was $6.0 million for the year ended December 31, 1999,
compared to $1.6 million for 1998. Interest expense increased primarily due to
the interest expense associated with our $100.0 million Senior Secured Notes
issued in April 1999. The Senior Secured Notes bear interest at an annual rate
of 11 3/8% and are due in March 2006.
Equity interest in net income of unconsolidated subsidiary was $931,000
for the year ended December 31, 1999, compared to $880,000 for 1998, an increase
of $51,000 or 5.8%. These amounts are associated with improved profits at the
Spectrum Club -- Manhattan Beach, which we sold in December 1999.
In the year ended December 31, 1999, we had a non-recurring gain of
$553,000 compared to a non-recurring charge of $314,000 for the year ended
December 31, 1998. The non-recurring gain in 1999 is associated with the sale of
the Spectrum Club - Fountain Valley in January 1999 and the sale of the
remaining Spectrum Clubs in December 1999. The non-recurring item in 1998 is
associated with our closing of the Spectrum Club - Santa Monica in November
1998.
Our net income before income taxes, non-recurring items, extraordinary
charge and cumulative effect of change in accounting principle was $3.1 million
for the year ended December 31, 1999, compared to $10.4 million for 1998. In
1999, we incurred a charge from a cumulative effect of change in accounting
principle, net of applicable taxes, of $899,000. This charge is associated with
the write off of pre-opening expenses incurred and capitalized prior to January
1, 1999. In 1998, we incurred a loss from early estinguishment of debt, net of
applicable taxes, of $2.2 million, which was recorded as an extraordinary
charge.
Our estimated income tax rate was 40% and 38% for the year ended
December 31, 1999 and 1998 respectively, resulting in net income of $1.3 million
for 1999 and $4.0 million for 1998. Basic and diluted earnings per share, before
non-recurring items, extraordinary charge and cumulative effect of change in
accounting principle was $.17 and $.17 in 1999 and $.35 and $.34 in 1998,
respectively. Basic and diluted net income per share was $.07 in 1999 and $.21
in 1998.
Pro forma fiscal 1999. During the fiscal year ended December 31, 1999,
we sold or disposed of all of our Spectrum Clubs (see Note 3 to consolidated
financial statements). Below is a discussion of the unaudited results of
operations for the fiscal years ended December 31, 1999 and 1998 on a pro forma
basis assuming the sale of the Spectrum Clubs occurred on January 1, 1998.
The purpose of the pro forma consolidated statements of operations are to
present what our operating results might have been for the years ended December
31, 1998 and 1999, had the sale of the Spectrum Clubs occurred on January 1,
1998. However, the pro forma consolidated statements of operation do not
purport to and do not represent what our actual results of operations might
have been had the Spectrum Club sale been completed on January 1, 1998.
Moreover, the pro forma consolidated statements of operation do not purport to
be projections of our results of operations either for the current period or
for any future periods and therefore should not be relied upon to project
future operating results. Operating results can be affected by a number of
circumstances the nature and effect of which cannot be predicted.
Our revenues for the year ended December 31, 1999, were $62.2 million,
compared to $57.9 million for 1998, an increase of $4.3 million or 7.4%. Revenue
increased primarily due to increases in membership dues and ancillary services
fees and the final maturation of the membership base at the Reebok Sports
Club/NY.
Operating expenses for the year ended December 31, 1999, were $56.0
million, compared to $49.0 million for 1998, an increase of $7.0 million or
14.1%. Operating expenses increased primarily due to additional direct expenses
associated with the increased revenues, increased general and administrative
expenses and the recognition of pre-opening costs. General and administrative
expenses increased primarily due to legal expenses associated with litigation
and the increase in corporate infrastructure related to our planned expansion.
Pre-opening expenses incurred in 1999 were $2.4 million. We adopted Statement of
Position 98-5, "Accounting for Start-Up Costs" ("SOP 98-5") effective January 1,
1999. SOP 98-5 provides that all costs related to the development of new fitness
clubs, except for real estate related costs, be expensed as incurred. This is a
change from our previous accounting policy, whereby many of these costs were
capitalized and charged to expense upon the Clubs opening.
Other expenses for the year ended December 31, 1999, were $2.3 million,
compared to other income of $2.3 million for 1998. The change in other income
and expense is primarily due to increased interest expense associated with our
$100.0 million Senior Secured Notes issued in April 1999.
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<PAGE> 15
Our pro forma net income for the year ended December 31, 1999 was $2.0
million or $0.11 per basic and diluted share, compared to net income of $4.6
million in 1998 or $0.25 per basic and diluted share. In 1999, we incurred a
charge from a cumulative effect of change in accounting principle, net of
applicable taxes, of $221,000. This charge is associated with the write off of
pre-opening expenses incurred and capitalized prior to January 1, 1999. In 1998,
we incurred a loss from early extinguishment of debt, net of applicable taxes of
$2.2 million, which was recorded as an extraordinary charge.
Fiscal 1998. Our revenues for the year ended December 31, 1998, were
$81.9 million, compared to $61.2 million for 1997, an increase of $20.7 million
or 33.8%. An increase of $14.6 million resulted from revenue at our new Clubs
acquired and/or opened during the last six months of 1997. Revenue growth of
$6.1 million resulted from the remaining Clubs and SportsMed.
Our direct operating expenses increased to $56.7 million for the year
ended December 31, 1998, compared to $43.5 million for 1997. The increase
resulted primarily from the Clubs acquired and/or opened during the last six
months of 1997. Direct operating expenses as a percentage of revenues decreased
to 69.3% for 1998 compared 71.2% for 1997. Operating margins continued to
improve at Reebok Sports Club/NY as membership levels at this Club mature. Lower
operating margins at acquired Clubs partially offset this increase.
Selling, general and administrative expenses were $8.6 million for the
year ended December 31, 1998, compared to $6.6 million for 1997. Selling costs
increased approximately $900,000 primarily due to Clubs acquired and/or opened
during the last six months of 1997. General and administrative costs increased
by approximately $1.1 million as we added corporate overhead to support the six
new Clubs and the growth of SportsMed. Selling, general and administrative costs
decreased as a percentage of revenue from 10.8% for 1997 to 10.4% for 1998.
Depreciation and amortization expenses were $5.3 million for the year
ended December 31, 1998, compared to $3.9 million for 1997. The increase is
primarily due to the addition of depreciation and amortization at the Clubs
acquired and/or opened during the last six months of 1997. Interest expense was
$1.6 million for the year ended December 31, 1998, compared to $3.2 million for
1997. Interest expense decreased due to the payoff of the note secured by The
Sports Club/LA in April 1998 with the proceeds of a Common Stock offering.
Equity interest in net income of unconsolidated subsidiary was $880,000
for the year ended December 31, 1998, compared to $696,000 for 1997, an increase
of $184,000 or 26.4%. These amounts are associated with improved profits at the
Spectrum Club -- Manhattan Beach.
Costs reported as non-recurring items were $314,000 for the year ended
December 31, 1998, compared to $2,025,000 for 1997. The non-recurring expense in
1998 is associated with our closing of the Spectrum Club -- Santa Monica and
moving its members to the Spectrum Club -- Water Garden. The non-recurring loss
in 1997 was the result of a litigation settlement.
Our net income before income taxes, non-recurring items and
extraordinary charge was $10.4 million for the year ended December 31, 1998,
compared to $4.6 million for 1997. In 1998, we incurred a loss from the early
extinguishment of debt, net of applicable taxes, of $2.2 million, which was
recorded as an extraordinary charge.
Our estimated income tax rate was 38% for the years ended December 31,
1998 and 1997, resulting in net income of $4.0 million for 1998 and $1.5 million
for 1997. Basic and diluted earnings per share, before non-recurring items and
extraordinary charge, was $.35 and $.34 in 1998 and $.22 and $.22 in 1997,
respectively. Basic and diluted net income per share was $.21 in 1998 and $.12
in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and Credit Availability. On April 1, 1999, we issued in a private placement
$100.0 million of 11 3/8% Senior Secured Notes due in March 2006 (the "Senior
Secured Notes") with interest due semi-
15
<PAGE> 16
annually beginning September 15, 1999. We used $37.6 million of the proceeds to
repay existing indebtedness. The balance is being used to develop new Clubs and
for general corporate purposes. The Senior Secured Notes are secured by
substantially all of our assets, other than certain excluded assets. In
connection with the issuance of the Senior Secured Notes, we entered into an
indenture dated as of April 1, 1999 (the "Indenture") which includes certain
covenants which limit our ability, subject to certain exceptions, to: (i) incur
additional indebtedness; (ii) pay dividends or other distributions, repurchase
capital stock or other equity interest or subordinated indebtedness; (iii) enter
into transactions with affiliates; (iv) make investments; (v) create liens or
sell certain assets and (vi) enter into mergers and consolidations.
Our bank credit facility provides us $15.0 million of financing with a
maturity date of May 31, 2001. Advances under our credit facility bear interest
at a variable rate of LIBOR plus 2 1/2% or the agent's prime rate. At December
31, 1999, no borrowings were outstanding under the credit facility and $4.0
million was utilized in the form of a letter of credit, leaving $11.0 million
available for future borrowings. Under the terms of the Indenture, we are
currently allowed to increase our existing bank facility by $5.0 million and to
incur an additional $8.8 million in equipment financing.
As part of a strategy to focus on The Sports Club/LA line of Clubs, we
sold our Spectrum Clubs during 1999. In April, we sold our Spectrum Club - Santa
Ana for $5.6 million in cash. In September, we completed the sale and leaseback
of the real estate at our Spectrum Club - Thousand Oaks and realized gross
proceeds of $12.0 million. In December, we sold our remaining Spectrum Clubs to
an investment group and realized gross proceeds of $48.4 million. With those
funds, we retired approximately $5.2 million of equipment financing obligations,
paid transaction fees and expenses, completed various construction projects at
several of the Spectrum Clubs and resolved litigation related to the Spectrum
Clubs. Our net proceeds from the December sale were approximately $38.0 million.
We have designated $9.1 million of this amount to be used for our two new Sports
Club/LA construction projects in New York City leaving $28.9 million. Under the
terms of our Indenture, we will be required, before December 3, 2000, to make an
offer to retire the Senior Notes to the extent these funds are not invested in
assets related to our business.
We generated $9.5 million of cash from operating activities in the year
ended December 31, 1999. During this year we repurchased $8.4 million of our
Common Stock at an average price of $4.23 per share. We invested $39.7 million
on new Club developments and $5.3 million for capital expenditures at existing
locations. On December 31, 1999 our balance of cash and short-term investments
was $77.5 million. Of this amount, $41.4 million has been segregated into a
disbursement escrow account and is specifically restricted for the development
of new Clubs.
New Club Development. In February 1998, we signed a lease with respect
to the development of The Sports Club/LA at Rockefeller Center in New York City.
We commenced pre-sale activities in October 1999 and opened the Club on February
14, 2000. We delivered a $4.0 million letter of credit to the landlord to secure
our performance under the lease agreement. As of December 31, 1999 we expect to
spend an additional $8.0 million from the disbursement escrow account for
constructing and equipping this Club.
In April 1998, we acquired rights to develop The Sports Club/LA at 61st
and 1st Streets on the Upper East Side in New York City. We issued a
non-interest bearing note for $2.7 million to the seller. The note requires two
equal principal payments in April 1999 and April 2000. We have not made the
April 1999 payment because we believe that we have various claims in connection
with the repairs and refurbishing of the Club which offset the money owed on the
note. Based on current estimates, as of December 31, 1999, we expect to spend
approximately $33.5 million constructing and equipping this Club, which
commenced pre-sale activities in September 1999. At December 31, 1999, we had
$24.4 million in our disbursement escrow account for construction of this Club.
The remaining $9.1 million will come from the Spectrum Clubs sales proceeds. We
currently expect to open this Club in the third quarter of 2000.
We have entered into lease agreements with Millennium Entertainment
Partners and/or their affiliates (collectively, "Millennium") with respect to
the development of Sports Club/LA's in San Francisco, Washington, D.C. and
Boston. Millennium began construction on each of these projects in
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<PAGE> 17
1998. Our portion of the aggregate development costs for these Clubs is
currently estimated to be approximately $16.5 million. The construction
disbursement account has $9.0 million reserved for the Boston and Washington,
D.C. sites. Millennium and its affiliates own approximately 28% of our
outstanding Common Stock. The Sports Club/LA in Washington D.C. is scheduled to
open in September 2000 and The Sports Club/LA in Boston and San Francisco are
expected to open in the second quarter of 2001.
In June 1998, we acquired undeveloped land in Houston, Texas, for
approximately $3.1 million, on which we intend to develop a Sports Club/LA. We
will not start construction at this location until the two new Sports Clubs/LA's
in New York City are open and operating to our satisfaction. Based on
preliminary estimates, we would spend approximately $20.0 million to complete
development of this Club.
Future Capital Requirements. In addition to the development projects
described above, we incur capital expenditures for normal replacement of fitness
equipment and remodeling of Clubs. Equipment financing and operating cash flow
have funded these expenditures. Amounts borrowed pursuant to equipment financing
arrangements are generally repayable in monthly installments over five years,
with effective interest rates between 8% and 10% per annum. While capital
expenditures may fluctuate from time to time, we generally expect to spend
approximately 4% of revenues on facility and equipment upgrades and
replacements. We also expect to spend approximately $1.5 million during the next
12 months to upgrade our management information systems. The terms of the
Indenture currently allow us to borrow an additional $8.8 million for equipment
financing. Operating cash flow will be utilized for the remaining capital
expenditures.
Our long-term capital needs are to provide funds for the developments
described above, for additional development and acquisition projects, to pay
interest on the Senior Secured Notes and for general corporate purposes. Future
acquisitions and developments will also require additional capital. Pursuant to
the terms of the Indenture, we may borrow up to $20.0 million under our credit
facility and up to $10.0 million through equipment financing. In addition, if
certain conditions are met, the terms of the Indenture and our credit facility
permit us to incur additional indebtedness. We may also consider entering into
joint venture and partnership agreements for the purpose of developing new
Clubs, subject to the terms of the Indenture and our credit facility.
We estimate that the cash in the disbursement escrow account, our cash
and short-term investment balances, operating cash flows, and credit available
under our credit facility and equipment financing will be sufficient to fund our
capital expenditures in fiscal 2000 and 2001 on the projects currently under
development.
YEAR 2000 READINESS
Until recently, computer programs were written to store only two digits
of date-related information in order to more efficiently handle and store data,
and thus are unable to distinguish between the year 1900 and the year 2000. This
problem is frequently referred to as the "Year 2000 Problem." We initiated a
Year 2000 Project to bring all of our information technology ("IT") systems and
non-IT systems into Year 2000 compliance. During 1999, we contacted our material
suppliers, service providers and contractors to determine the extent of our
vulnerability to those third parties' failure to remedy their own Year 2000
issues. To our knowledge, these suppliers, service providers and contractors
have incurred no problems with their own Year 2000 issues that impacted us.
Utilizing internal resources, we defined, assessed and converted, or replaced,
various programs, hardware and instrumentation systems to make them Year 2000
compliant. We successfully completed our Year 2000 planning, replacements and or
conversions and have had no Year 2000 related problems.
We have developed a contingency plan to handle any unexpected Year 2000
problems that may occur in the future.
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<PAGE> 18
FORWARD-LOOKING STATEMENTS
From time to time we make "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements include the words "may,"
"will," "estimate," "continue," "believe," "expect" or "anticipate" and other
similar words. The forward-looking statements contained in this Report are
generally located in the material set forth under the headings, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Financial Statements" and "Business" but may be found in other locations as
well. Forward-looking statements may also be found in our quarterly and other
reports filed with the Securities and Exchange Commission and in our press
releases and other statements. These forward-looking statements generally relate
to our plans and objectives for future operations and are based upon
management's reasonable estimates of future results or trends. Although we
believe that our plans and objectives reflected in or suggested by such
forward-looking statements are reasonable, such plans or objectives may not be
achieved. Actual results may differ from projected results due to unforeseen
developments including developments relating to the following:
- the availability and adequacy of our cash flow and financing
facilities for our requirements, including payment of our Senior
Secured Notes,
- our ability to attract and retain members, which depends on
competition, market acceptance of new and existing sports and
fitness clubs and services, demand for sports and fitness club
services generally and competitive pricing trends in the sports
and fitness market,
- our ability to successfully develop new sports and fitness
clubs,
- disputes or other problems arising with our development partners
or landlords,
- changes in economic, demographic and other conditions in the
geographic areas in which we operate, including business
interruptions resulting from earthquakes or other causes,
- competition,
- changes in personnel or compensation, and
- changes in statutes and regulations or legal proceedings and
rulings.
We will not update forward-looking statements even though our situation
will change in the future.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................................... F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999.......................................... F-2
Consolidated Statements of Income for each of the Years in the Three-Year Period
ended December 31, 1999............................................................................... F-3
Consolidated Statements of Stockholders' Equity for each of the Years in the Three-Year Period
ended December 31, 1999................................................................................ F-4
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
Consolidated Statements of Cash Flows for each of the Years in the Three-Year Period F-5
ended December 31, 1999................................................................................
Notes to Consolidated Financial Statements............................................................. F-6
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
19
<PAGE> 20
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, 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, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
LOS ANGELES, CALIFORNIA
FEBRUARY 25, 2000
F-1
<PAGE> 21
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................................... $ 2,233 $ 53,060
Short term investments ........................................................ -- 24,436
Accounts receivable, net of allowance for doubtful accounts of $215 and $342 at
December 31, 1998 and 1999, respectively .................................... 2,480 2,149
Inventories ................................................................... 1,527 1,355
Other current assets .......................................................... 569 2,183
Due from affiliates ........................................................... 234 158
--------- ---------
Total current assets ..................................................... 7,043 83,341
Property and equipment, net ....................................................... 135,269 118,959
Equity interest in unconsolidated subsidiary ...................................... 1,295 50
Costs in excess of net assets acquired, less accumulated amortization of
$1,294 and $1,588 at December 31, 1998 and 1999, respectively ................. 15,443 13,890
Organizational costs and other assets, net ........................................ 4,707 7,313
--------- ---------
$ 163,757 $ 223,553
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and capitalized lease obligations ....... $ 7,746 $ 3,520
Accounts payable .............................................................. 2,273 2,052
Accrued liabilities ........................................................... 6,227 8,549
Deferred membership revenues .................................................. 9,953 9,712
--------- ---------
Total current liabilities ................................................ 26,199 23,833
Notes payable and capitalized lease obligations, less current installments ........ 18,755 100,367
Notes payable to bank ............................................................. 10,940 --
Deferred lease obligations ........................................................ 2,724 1,066
Minority interest ................................................................. 600 600
--------- ---------
Total liabilities ........................................................ 59,218 125,866
Commitments and contingencies
Stockholders' 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;
20,896,623 and 20,907,289 shares issued and outstanding at
December 31, 1998 and 1999, respectively .................................... 209 209
Additional paid-in capital .................................................... 102,361 102,403
Retained earnings ............................................................. 9,656 10,966
Treasury stock, at cost, 1,258,691 and 3,194,536 shares at
December 31, 1998 and 1999, respectively .................................... (7,687) (15,891)
--------- ---------
Total stockholders' equity ............................................... 104,539 97,687
--------- ---------
$ 163,757 $ 223,553
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 22
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues ...................................................................... $ 61,154 $ 81,923 $ 87,325
Operating expenses:
Direct .................................................................... 43,517 56,746 60,528
Selling, general and administrative ....................................... 6,607 8,556 9,234
Depreciation and amortization ............................................. 3,919 5,282 6,147
Pre-opening expenses ...................................................... -- -- 3,090
-------- -------- --------
Total operating expenses ............................................. 54,043 70,584 78,999
-------- -------- --------
Income from operations ........................................... 7,111 11,339 8,326
Other income (expense):
Interest .................................................................. (3,206) (1,629) (5,991)
Minority interests ........................................................ (22) (150) (150)
Equity interest in net income of unconsolidated subsidiary ................ 696 880 931
Non-recurring items ....................................................... (2,025) (314) 553
-------- -------- --------
Income before income taxes, extraordinary charge and
cumulative effect of change in accounting principle ................ 2,554 10,126 3,669
Provision for income taxes .................................................... 1,014 3,971 1,460
-------- -------- --------
Income before extraordinary charge and cumulative effect of
change in accounting principle ..................................... 1,540 6,155 2,209
Extraordinary charge from early extinguishment of debt,
net of income tax benefit of $1,331 ....................................... -- 2,173 --
Cumulative effect of change in accounting principle,
net of income tax benefit of $600 ......................................... -- -- 899
-------- -------- --------
Net income ......................................................... $ 1,540 $ 3,982 $ 1,310
======== ======== ========
Income per share before extraordinary charge and cumulative effect of change in
accounting principle:
Basic ..................................................................... $ 0.12 $ 0.33 $ 0.12
======== ======== ========
Diluted ................................................................... $ 0.12 $ 0.33 $ 0.12
======== ======== ========
Effect of extraordinary charge and cumulative effect of change in accounting
principle:
Basic ..................................................................... $ -- $ (0.12) $ (0.05)
======== ======== ========
Diluted ................................................................... $ -- $ (0.12) $ (0.05)
======== ======== ========
Net income per share:
Basic ..................................................................... $ 0.12 $ 0.21 $ 0.07
======== ======== ========
Diluted ................................................................... $ 0.12 $ 0.21 $ 0.07
======== ======== ========
Weighted average number of common shares outstanding:
Basic ..................................................................... 12,524 18,603 18,114
======== ======== ========
Diluted ................................................................... 12,683 18,829 18,290
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 23
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 .................. 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)
Net income ........................... -- -- -- 3,982 -- --
Sale of common stock net
of issuance cost of $695 ........... 6,500 65 48,639 -- -- --
Treasury stock repurchased ........... -- -- -- -- 1,107 (6,800)
Reissuance of treasury stock
for employee stock plans ........... -- -- 45 -- (12) 67
Exercise of employee stock options ... 10 -- 26 -- -- --
Issuance of common stock to
outside directors .................. 4 -- 38 -- -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 ................ 20,897 209 102,361 9,656 1,259 (7,687)
Net income ........................... -- -- -- 1,310 -- --
Treasury stock repurchased ........... -- -- -- -- 1,975 (8,357)
Reissuance of treasury stock
for employee stock plans ........... -- -- -- -- (39) 153
Exercise of employee stock options ... 2 -- 7 -- -- --
Issuance of common stock to
outside directors .................. 8 -- 35 -- -- --
-------- -------- -------- -------- -------- --------
Balance, December 31, 1999 ................ 20,907 $ 209 $102,403 $ 10,966 3,195 $(15,891)
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 24
THE SPORTS CLUB COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-YEAR PERIOD ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 1,540 $ 3,982 $ 1,310
Adjustments to reconcile net income to cash provided by operations ..
Loss on early extinguishment of debt, net of tax ............... -- 2,173 --
Cumulative effect of change in accounting principle ............ -- -- 899
Gain on sale of Spectrum Clubs ................................. -- -- (783)
Depreciation and amortization .................................. 3,919 5,282 6,147
Equity interest in net income of unconsolidated subsidiary ..... (696) (880) (931)
Distributions from unconsolidated subsidiary ................... 469 447 1,106
Stock issued for employee benefit plan ......................... 80 67 153
Stock issued as directors' fees ................................ 33 38 35
Minority interest in Reebok Sports Club/NY ..................... (128) -- --
(Increase) in:
Accounts receivable, net ................................... (1,176) (408) (59)
Inventories ................................................ (395) (714) (131)
Other current assets ....................................... (2,187) (830) (1,087)
Increase (decrease) in:
Accounts payable ........................................... (493) 1,325 (285)
Accrued liabilities ........................................ 2,439 (382) 2,836
Deferred membership revenues ............................... 1,635 17 650
Deferred lease obligations ................................. (492) (93) (409)
-------- -------- --------
Net cash provided by operating activities .................. 4,548 10,024 9,451
Cash flows from investing activities:
Capital expenditures ................................................ (4,899) (28,623) (45,025)
Business acquisitions, net of cash acquired ......................... (10,778) -- (902)
Purchase of other assets ............................................ -- -- (124)
Proceeds from sale of Spectrum Clubs ................................ -- -- 60,778
Purchase of short term investments .................................. -- -- (24,436)
Treasury stock acquired ............................................. (1,034) (6,800) (8,357)
-------- -------- --------
Net cash used for investing activities ..................... (16,711) (35,423) (18,066)
Cash flows from financing activities:
(Increase) decrease in due from affiliates .......................... 937 (128) 76
Exercise of employee stock options .................................. -- 26 7
Proceeds from Senior Secured Notes - net of costs & discount ........ -- -- 93,713
Proceeds from sale of common stock .................................. 10,000 48,704 --
Proceeds from notes payable and capitalized lease obligations ....... 2,324 10,940 37,263
Repayments of notes payable and capitalized lease obligations ....... (3,663) (33,491) (71,617)
-------- -------- --------
Net cash provided by financing activities .................. 9,598 26,051 59,442
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... (2,565) 652 50,827
Cash and cash equivalents at beginning of year .......................... 4,146 1,581 2,233
-------- -------- --------
Cash and cash equivalents at end of year ................................ $ 1,581 $ 2,233 $ 53,060
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .............................. $ 3,599 $ 2,636 $ 6,389
======== ======== ========
Cash paid during the year for income taxes .......................... $ 306 $ 1,881 $ 2,010
======== ======== ========
Capital expenditures financed ....................................... $ 7,223 $ 5,690 $ --
======== ======== ========
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-5
<PAGE> 25
THE SPORTS CLUB COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
1. ORGANIZATION
The Sports Club Company, Inc. (the "Company") operates sports and
fitness Clubs ("Clubs"), under the "Sports Club" and until December 1999 the
"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 range of services. Both Sports
Clubs and Spectrum Clubs are marketed to affluent, health conscience individuals
who desire a premier Club. In December 1999, the Company sold the Spectrum Clubs
to an investment group (See Note 3).
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 initiation fees and monthly membership 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
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1999,
cash and cash equivalents were $53.1 million, of which $17.0 million has been
segregated into a disbursement escrow account and is specifically restricted and
designated for the development of new clubs. In addition, $7.5 million of cash
and cash equivalents, from the proceeds of the sale of the Spectrum Clubs, are
held in escrow accounts and will be released to the Company upon satisfaction of
certain conditions of the sale (See Note 3).
Short Term Investments
The Company considers investments with original maturities of greater
than three months and less than or equal to one year to be short-term
investments. At December 31, 1999, short term investments of $24.4 million, are
segregated into a disbursement escrow account which is restricted and
specifically designated for the development of new Clubs. The Company's
short-term investments are invested in high grade commercial paper and United
States government agency discount notes.
F-6
<PAGE> 26
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 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. Costs in excess of net assets of acquired businesses are being
amortized on a straight-line basis over forty years.
Start-up Costs
The Company adopted Statement of Position 98-5, "Accounting for Start-Up
Costs" ("SOP 98-5") effective January 1, 1999. SOP 98-5 provides that all costs
related to the development of new sports and fitness clubs, except for real
estate related costs, be expensed as incurred. This is a change from the
Company's previous accounting policy, whereby many of these costs were
capitalized and charged to expense upon the Club opening. As a result, the
Company recorded a one-time charge equal to the unamortized balance of all
capitalized start-up costs as of January 1, 1999. This charge was recorded as a
cumulative effect of a change in accounting principle net of the related income
tax effect. The amount of this charge before income taxes was approximately $1.5
million.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable
intangible assets 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. The Company has not experienced an impairment of value of any of
its long-lived or identifiable intangible assets as of December 31, 1999.
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
The Company presents Basic and Diluted earnings per share. Basic
earnings reflects only the actual weighted average shares of common stock
outstanding during the period. Diluted earnings per share includes the effects
of all dilutive options, warrants and other securities and utilizes the treasury
stock method.
F-7
<PAGE> 27
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, 1999. The carrying amounts related to cash and cash equivalents,
short-term investments, 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.
Segment Reporting
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131") effective January 1, 1998. SFAS
131 establishes standards for public enterprises to report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures concerning products and services,
geographic areas and major customers. Management has determined that the Company
has one principal operating segment, the operation of sports and fitness clubs.
The adoption of SFAS 131 has had no impact on the Company's financial position
or results of operations.
Computer Software Costs
The Company adopted Statement of Position 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1")
effective January 1, 1999. SOP 98-1 provides guidance as to appropriate
treatment of internal use software costs that is acquired or internally
developed. The adoption of SOP 98-1 did not have a material impact upon the
Company's financial position or results of operations.
3. ACQUISITIONS AND DISPOSITIONS
Sports Clubs Acquisitions
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%.
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. 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 Acquisitions
On December 31, 1997, the Company acquired four Clubs from Racquetball
World, which were operated as Spectrum Clubs, for a total purchase price
(including the portion paid by Millennium described
F-8
<PAGE> 28
below) of approximately $19.4 million. Millennium acquired properties underlying
two of the Clubs for $10.0 million and leased these two properties to the
Company under a financing lease agreement which was reflected as a capitalized
lease obligation in the Company's 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 119,093 shares of the Company's Common Stock
valued at approximately $479,000 will be issued to one of the selling entities.
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 are included in the Company's
statement of operations from the date of acquisition.
SportsMed 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.
Spectrum Clubs Dispositions
In September of 1999, the Company completed the sale and leaseback of
the real estate at the Spectrum Club - Thousand Oaks for approximately $12.0
million. On December 3, 1999, the Company completed the sale of the Spectrum
Clubs, a group of ten sports and fitness clubs located in Southern California,
to an investment group for approximately $48.4 million. The Company recorded a
pre-tax gain of approximately $783,000 and an after tax gain of approximately
$470,000 ($0.03 per diluted share after tax) on the sale of the Spectrum Clubs.
The consolidated financial statements and accompanying notes reflect the
operating results of the Spectrum Clubs as a continuing operation. Pro-forma
consolidated operating results for the fiscal years ended December 31, 1998 and
1999 are presented below. The pro-forma statements present the unaudited results
of operations as if the Spectrum Clubs had been sold at the beginning of each
period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues ............................................... $ 57,944 $ 62,229
Operating expenses ..................................... 49,037 55,963
-------- --------
Income from operations .............................. 8,907 6,266
Other income (expense) ................................. 2,288 (2,314)
-------- --------
Income before income taxes, extraordinary charge and
Cumulative effect of change in accounting principle . 11,195 3,952
Income tax provision ................................... 4,390 1,724
-------- --------
Income before extraordinary charge and cumulative
effect of change in accounting principle ............ 6,805 2,228
Extraordinary charge, net of tax ....................... 2,173 --
Cumulative effect of change in accounting principle,
net of tax .......................................... -- 221
-------- --------
Net income ............................................. $ 4,632 $ 2,007
======== ========
Net income per share
Basic ............................................... $ 0.25 $ 0.11
======== ========
Diluted ............................................. $ 0.25 $ 0.11
======== ========
</TABLE>
F-9
<PAGE> 29
4. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, less accumulated
depreciation, which is summarized as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land ......................................... $ 21,484 $ 18,632
Building and improvements .................... 107,000 98,540
Furniture, fixtures and equipment ............ 19,305 14,660
-------- --------
147,789 131,832
Less accumulated depreciation and amortization 12,520 12,873
-------- --------
Net property and equipment ................... $135,269 $118,959
======== ========
</TABLE>
Equipment under capital leases was $10,479,000 and $3,660,000 and
related accumulated amortization was $3,271,000 and $2,440,000 at December 31,
1998 and 1999, respectively.
Included in buildings and improvements at December 31, 1998 is
$10,000,000 of buildings acquired under a capital lease in connection with the
acquisition of two Spectrum Clubs (See Note 3). No amortization was recorded for
the year ending December 31, 1997 due to the close proximity of the acquisition
to the end of the year. Accumulated amortization at December 31, 1998 was
$255,000. The capital lease was paid off in April 1999.
5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Notes payable and capitalized lease obligations are summarized as
follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Senior secured notes (a) ....................... $ -- $100,000
The Sports Club/Irvine note (b) ................ 4,375 --
Spectrum Club - Agoura Hills note (c) .......... 2,506 --
Spectrum Clubs Fullerton and Santa Ana lease (d) 9,745 --
Equipment financing loans (e) .................. 7,208 1,220
Other notes payable (f) ........................ 2,667 2,667
-------- --------
26,501 103,887
Less current installments ...................... 7,746 3,520
-------- --------
$ 18,755 $100,367
======== ========
</TABLE>
(a) On April 1, 1999, the Company issued in a private placement $100.0 million
of Senior Secured Notes (the "Senior Secured Notes") with interest due
semi-annually beginning September 15, 1999. The Senior Secured Notes bear
interest at an annual rate of 11 3/8% and are due in March 2006. In May 1999,
the Company exchanged the Senior Secured Notes for registered Series B Senior
Secured Notes.
The Senior Secured Notes are secured by substantially all of the Company's
assets, other than certain excluded assets. In connection with the issuance of
the Senior Secured Notes, the Company entered into an indenture dated as of
April 1, 1999 (the "Indenture") which includes certain covenants which limit the
Company's ability, subject to certain exceptions, to: (i) incur additional
indebtedness; (ii) pay dividends or other distributions, repurchase capital
stock or other equity interest or subordinated indebtedness; (iii) enter into
transactions with affiliates; (iv) make investments; (v) create liens or sell
certain assets and (vi) enter into mergers and consolidations.
Under the terms of the Indenture, after March 15, 2003, the Company may, at its
option, redeem all or some of the Senior Secured Notes at a redemption price
that will decrease over time from 105.688% to
F-10
<PAGE> 30
100% of their face amount, plus interest. Prior to March 15, 2002, if the
Company publicly offers certain equity securities the Company may, at its
option, apply certain of the net proceeds from those transactions to the
redemption of up to 35% of the principle amount of the Senior Secured Notes at
111.375% of their face amount, plus interest. If the Company undergoes a change
in control, as defined in the Indenture, it must give holders of the Senior
Secured Notes the opportunity to sell their Senior Secured Notes to the Company
at 101% of their face amount, plus interest. At December 31, 1999 the estimated
fair value of the Senior Secured Notes was $98.75 million.
(b) The Sports Club/Irvine note was issued to previous owners of this Club. The
note was secured by land, equipment, building improvements and the building of
The Sports Club/Irvine, bore interest at the rate of 6%, and required quarterly
principal payments of $125,000 and a balloon payment of $4.0 million on November
1, 1999. This note was paid off with part of the proceeds from the issuance of
the Company's Senior Secured Notes on April 1, 1999.
(c) The Spectrum Club - Agoura Hills note was issued by a savings and loan
association to complete the Company's acquisition of the Spectrum Club - Agoura
Hills. The note was secured by land, equipment, building improvements and the
building of the Spectrum Club - Agoura Hills. The note bore interest at the rate
of 8.5%. Monthly principal and interest payments of $20,107 were required
through the note's maturity in April 2024. This note was paid off with part of
the proceeds from the issuance of the Company's Senior Secured Notes on April 1,
1999.
(d) In December 1997, the Company acquired four Spectrum Clubs. Millennium
acquired properties underlying two of the Clubs for $10.0 million and leased
these two properties to the Company under a financing lease agreement which was
reflected as a capital lease obligation in the Company's consolidated balance
sheet. This capital lease was paid off with part of the proceeds from the
issuance of the Company's Senior Secured Notes on April 1, 1999.
(e) The equipment financing loans 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) This note was issued in connection with the acquisition of The Sports
Club/LA site at 61st and 1st Street in New York. The note agreement provided for
payments in installments of $1,334,000 and 1,333,000 due in April 1999 and April
2000, respectively. The Company believes that they have various claims in
connection with the repair and refurbishing of the Club which offset the money
owed on the Note.
Future minimum annual principal payments at December 31, 1999, are as
follows (in thousands):
<TABLE>
<S> <C>
2000..................................................... $ 3,520
2001..................................................... 363
2002..................................................... 4
2003..................................................... --
2004..................................................... --
Thereafter............................................... 100,000
-----------
$ 103,887
===========
</TABLE>
6. BANK CREDIT FACILITY
At December 31, 1999, the Company had a $15.0 million bank credit
facility. The facility matures on May 31, 2001 and bears interest at a variable
rate of LIBOR plus 2 1/2% or the bank's prime rate. At that date, $4.0 million
was utilized in the form of a letter of credit. The loans are secured by all the
assets of The Sports Club/Irvine and The Sports Club/Las Vegas. The agreement
also requires the Company to maintain certain Tangible Net Worth, Debt Coverage
and Senior Liabilities to Tangible Net Worth Ratio requirements. The Company was
in compliance with its covenants as of December 31, 1999.
F-11
<PAGE> 31
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases certain facilities pursuant to various operating
lease agreements. The Sports 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 50 years, including renewal options, with the earliest Sports Club lease
expiration date of January 31, 2013. Future minimum noncancelable operating
lease payments as of December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
NET
SUBLEASE RENTAL
COMMITMENTS RENTALS COMMITMENTS
----------- ------- -----------
<S> <C> <C> <C>
Year ending December 31:
2000 ............................ $ 17,114 $ 5,400 $ 11,714
2001 ............................ 25,025 5,400 19,625
2002 ............................ 26,691 5,425 21,266
2003 ............................ 27,256 5,498 21,758
2004 ............................ 27,507 5,712 21,795
Thereafter ...................... 348,444 53,555 294,889
-------- -------- --------
Total minimum lease payments $472,037 $ 80,990 $391,047
======== ======== ========
</TABLE>
Rent expense for facilities and equipment aggregated, $7,438,000,
$8,174,000 and $8,440,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
Litigation
Randy Pinkerton and Nick Thedes, individually and as Partners of Think
Physical Therapy v. SCC California, Inc. (Orange County Superior Court). On
April 23, 1999, Randy Pinkerton and Nick Thedes, individually and as partners of
Think Therapy Physical Therapy (collectively, "Think Therapy") filed an action
against SCC California, Inc., ("Spectrum"), a wholly-owned subsidiary, alleging
among other things, breach of contract and interference with economic
relationships. The complaint seeks declaratory relief (including the
confirmation of Think Therapy's lease term through December 1999), unspecified
compensatory damages and attorneys' fees. The contract which Think Therapy
alleges was breached relates to a lease at the former Spectrum Club - Santa Ana
facility ("Santa Ana Club") which facility was acquired by Spectrum in December
1997 and sold in April 1999 as commercial property unrelated to the sports and
fitness business. The Company believes that Think Therapy was on a
month-to-month lease and in connection with the sale of the Santa Ana Club the
lease was terminated by serving a thirty day Notice to Quit in March 1999. The
Company has responded to the complaint against them and believes the allegations
are without merit and will vigorously defend this lawsuit.
Lyudmirsky and those similarly situated v. Sports Club, Inc. of
California; LA/Irvine Sports Club, Ltd. (Los Angeles Superior Court). On June
25, 1999, Ilya Lyudmirsky ("Lyudmirsky") filed a class action lawsuit against
Sports Club, Inc. of California and LA/Irvine Sports Club, Ltd. alleging, among
other things, violations of California Civil Code Section 1812.80 et seq.,
claiming the Company's membership fee structure and membership contracts violate
certain provisions of the Health Studio Services Act (the "HSS Act"). Lyudmirsky
further alleges violations of the Unruh Act and the Consumer Legal Remedies Act,
claiming the Company gives unlawful, preferential discounts to attractive women
and advertises membership fees which are higher than fees actually charged to
some members. The complaint seeks equitable relief, (including a temporary and
permanent injunction), unspecified compensatory damages, punitive damages and
attorneys' fees. The Company stipulated to a preliminary injunction, which
prohibits it from violating the HSS Act, effective as of November 29, 1999. On
October 22, 1999, the Court ruled that Lyudmirsky's membership contract violated
the HSS Act and is void. However, the Court has not ruled that Lyudmirsky
suffered damages as a result of the violation of the HSS Act. Under the HSS Act,
a
F-12
<PAGE> 32
claimant may recover an amount up to three times the actual damages suffered
plus attorneys' fees. The amount of actual damages is measured by the amount
paid less reasonable value of services. The Company believes the initiation fees
and monthly dues are reasonable and that members have not suffered actual
damages as a result of the alleged violation of the HSS Act. The hearing on
Lyudmirsky's motion for class certification regarding the HSS Act claim is set
for March 29, 2000. The Company has denied violating the Unruh Act, and
providing preferential discounts to women based on beauty. The Company has also
denied making misleading or false statements regarding pricing structure or
discounts. The Company is in the process of evaluating Lyudmirsky's damage claim
as well as the size of the class which may be certified with respect to the HSS
claim and is unable at this time to estimate the damages, if any, which any
class may be awarded. However, if a significantly large class is certified and
the court or jury accepts plaintiff's damage claims, this action may have a
materially adverse effect on the Company's financial condition. The trial date
is August 7, 2000.
Park Place Entertainment Corporation v. The Sports Club Company, Inc.
(Los Angeles Superior Court). On December 23, 1999, Park Place Entertainment
Corporation ("Park Place") filed an action against the Company for money due on
a promissory note. Park Place is the current holder of a purchase money
promissory note in the amount of $2,666,666 (the "Note") given to Hilton Hotels
Corporation ("Hilton") in connection with the 1998 acquisition of the Vertical
Club - a sports and fitness club located in New York (the "Club"). The Company
believes they have various claims in connection with the repair and refurbishing
of the Club which offset the money owed on the Note. Park Place feels that no
basis exists which excuses the Company from the timely payment of installments
on the Note and is asking for damages in the amount of $2,666,666 plus interest,
attorneys' fees and costs of the suit. On February 25, 2000, the Company filed
an answer raising offsets and a cross-complaint against Hilton seeking damages
in the amount of $14,415,000 for alleged breach of contract, fraud and negligent
misrepresentation, plus interest, attorneys' fees and costs of suit. Hilton has
not yet responded. The Company is just commencing discovery and intends to
vigorously pursue their cross-claims. The Company is unable to estimate, at this
time, the amount, if any, that will be awarded in this matter.
Other. The Company is involved in various claims and lawsuits incidental
to its business, including claims arising from accidents. However, in the
opinion of management, the Company is adequately insured against such claims and
lawsuits involving personal injuries, and any ultimate liability arising out of
any such proceedings will not have a material adverse effect on the financial
condition, cash flow or operations of the Company.
Employment Agreements
At December 31, 1999, The Company had employment agreements with three
key executive officers which expire on December 31, 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.
F-13
<PAGE> 33
8. INCOME PER SHARE
The following is a reconciliation of the basic and diluted income per
share computations for the years 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income used for basic and
diluted income per share ........ $ 1,540 $ 3,982 $ 1,310
======= ======= =======
Shares of Common Stock and
Common Stock equivalents:
Weighted average shares used
in basic computation ...... 12,524 18,603 18,114
Weighted stock options ..... 159 226 176
------- ------- -------
Impact from dilutive shares 12,683 18,829 18,290
======= ======= =======
Income per share:
Basic ........................... $ 0.12 $ 0.21 $ 0.07
======= ======= =======
Diluted ......................... $ 0.12 $ 0.21 $ 0.07
======= ======= =======
</TABLE>
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal .......................................................... $ 842 $ 2,893 $ 2,126
State ............................................................ 255 839 537
------- ------- -------
1,097 3,732 2,663
------- ------- -------
Deferred:
Federal .......................................................... (78) 156 (923)
State ............................................................ (5) 83 (280)
------- ------- -------
(83) 239 (1,203)
------- ------- -------
Income tax provision ................................................... $ 1,014 $ 3,971 $ 1,460
======= ======= =======
Tax benefit from extraordinary charge and cumulative effect of change in
accounting principle:
Federal .......................................................... $(1,021) $ (510)
State ............................................................ (310) (90)
------- -------
Total provision from extraordinary charge and cumulative
effect of change in accounting principle ............................... $(1,331) $ (600)
======= =======
</TABLE>
F-14
<PAGE> 34
Income tax expense from net income before income taxes, extraordinary
charge and cumulative effect of change in accounting principle, differs from the
statutory rate as applied to net income before income taxes, extraordinary
charge and cumulative effect of change in accounting principle as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense .......... $ 868 $ 3,443 $ 1,338
Increase (decrease) in tax resulting from:
State taxes - net of federal benefit . 165 609 110
Meals and entertainment .............. 8 8 24
Goodwill amortization ................ 80 80 (52)
Other ................................ (107) (169) 40
------- ------- -------
Income tax provision ..................... $ 1,014 $ 3,971 $ 1,460
======= ======= =======
</TABLE>
The effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented as follows. The
net deferred tax liability is recorded in accrued expenses on the consolidated
balance sheet.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Deferred initiation fees ............ $ 811 $ 1,245
Accrued vacation .................... 182 231
Bad debt ............................ 86 133
State taxes ......................... 180 492
------- -------
Gross deferred tax assets .... 1,259 2,101
------- -------
Deferred tax liabilities:
Depreciation and amortization ....... (3,889) (3,513)
Other ............................... (542) (2,482)
------- -------
Gross deferred tax liabilities (4,431) (5,995)
------- -------
Net deferred tax liability ............... $(3,172) $(3,894)
======= =======
</TABLE>
10. STOCK PLANS
The Company has elected to measure the impact of its stock options under
the provisions of APB No. 25, using the intrinsic value method. Entities
electing to remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and income per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied.
The Company has an employee stock option plan which is described below.
The Company applied APB 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
-----------------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported .. $1,540 $3,982 $1,310
Pro forma .... $1,368 $3,504 $ 632
Basic income per share:
As reported .. $ .12 $ .21 $ .07
Pro forma .... $ .11 $ .19 $ .03
</TABLE>
F-15
<PAGE> 35
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 1997, 1998 and
1999 respectively: dividend yield of 0%, 0% and 0%; expected volatility of
62.1%, 71.4% and 100.1% risk-free interest rates of 6.5%, 6.0% and 6.25% and
expected economic lives of 6.0 years, 5.9 years and 6.0 years.
1,800,000 shares of Common Stock are reserved under the Company's
Amended and Restated 1994 Stock Incentive Plan (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 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. Except for
the options granted to D. Michael Talla, Co-Chief Executive Officer, which
expire on the fifth anniversary of the grant date, all options will expire on
the tenth anniversary of the grant date.
A summary of the status of the Company's stock option plans as of
December 31, 1997, 1998 and 1999 and changes during the years then ended are
presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
<S> <C> <C>
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 exercisable at December 31, 1997 ....... 334,512 3.23
=========
Weighted-average per share fair value of options
granted during year ended December 31, 1997 . 3.53
Outstanding at January 1, 1998 ................. 642,500 3.77
Granted ........................................ 342,000 7.99
Canceled ....................................... 2,000 2.56
Exercised ...................................... 10,002 2.61
---------
Outstanding at December 31, 1998 ............... 972,498 5.25
=========
Options exercisable at December 31, 1998 ....... 462,696 3.52
=========
Weighted-average per share fair value of options
granted during year ended December 31, 1998 . 5.43
Outstanding at January 1, 1999 ................. 972,498 5.25
Granted ........................................ 210,000 3.94
Canceled ....................................... 10,000 5.59
Exercised ...................................... 2,666 2.70
---------
Outstanding at December 31, 1999 ............... 1,169,832 5.01
=========
Options exercisable at December 31, 1999 ....... 683,166 4.32
=========
Weighted-average per share fair value of options
granted during year ended December 31, 1999 . 3.22
</TABLE>
F-16
<PAGE> 36
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE
------ ----------- ------------ -----------
<S> <C> <C> <C>
$8.3750 27,000 7.85 18,000
5.3750 63,000 7.51 42,000
4.3750 60,000 7.22 40,000
2.7500 53,666 6.84 53,666
2.5625 57,166 6.41 57,166
2.6875 70,000 6.11 70,000
3.0000 225,000 5.51 225,000
5.2500 64,000 5.25 64,000
8.2500 30,000 3.32 10,000
8.0000 300,000 8.29 100,000
7.0000 10,000 8.55 3,334
3.9375 210,000 9.10 --
------------- -------------
1,169,832 683,166
============= =============
</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, 1999, 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, 1999, no purchase rights had been granted.
In July 1994, the Company instituted its 1994 Stock Compensation Plan
(which was amended in July 1999) 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 24,000 shares have been issued to outside directors under
the plan.
11. RELATED PARTY TRANSACTIONS
Due from affiliates consist of advances made to unconsolidated
affiliates in the normal course of business. Such advances are payable on
demand.
Until December 3, 1999, the Company managed the operation of its
unconsolidated subsidiary, the Spectrum Club - Manhattan Beach, of which it
owned a 46.1% interest. The Company received a fee of $33,322 per month plus
4.5% of the Club's gross revenues for managing this Club. The Company also
manages the operations of the Reebok Sports Club/NY and receives a fee of
approximately 5.87% of the gross monthly collections, as defined. Management
fees of $1.1 million, $1.3 million and $1.4 million relating to Reebok Sports
Club/NY were earned for the years ended December 31, 1997, 1998 and 1999. These
amounts are eliminated from income and expense in the presentation of the
Company's 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, Washington
D.C., and Boston.
F-17
<PAGE> 37
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.
F-18
<PAGE> 38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following provides certain information regarding our directors and
executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
D. Michael Talla....................... 53 Chairman of the Board and Co-Chief Executive Officer
Rex A. Licklider....................... 57 Vice Chairman of the Board and Co-Chief Executive Officer
Nanette Pattee Francini................ 51 Executive Vice President and Director
Timothy M. O'Brien..................... 48 Chief Financial Officer and Assistant Secretary
Philip J. Swain........................ 42 Sr. Vice President of Operations
Mark S. Spino.......................... 45 Sr. Vice President of Development
Brian J. Collins....................... 39 Director
Andrew L. Turner....................... 53 Director
Dennison T. Veru....................... 39 Director
</TABLE>
The following information summarizes the business experience during at
least the past five years of each of our directors and executive officers.
D. Michael Talla began developing sports and fitness clubs in 1977. He
has served as Chairman of the Board since our inception in 1994 and served until
July 1999 as our Chief Executive Officer. Mr. Talla assumed the position of
Co-Chief Executive Officer with Mr. Licklider in February 2000. He has been in
the sports and fitness industry for more than 20 years and has developed or
participated in the development of more than 25 sports and fitness clubs in the
United States, including all Clubs developed by The Sports Club Company. Mr.
Talla holds a Bachelor of Arts Degree in Business Administration from the
University of Arizona.
Rex A. Licklider has served as Vice Chairman of the Board since 1994 and
was appointed Co-Chief Executive Officer in February 2000 and has served as the
Vice Chairman of the Board since 1994. Mr. Licklider has been a consultant to us
for strategic and financial planning since our inception. He founded Com
Systems, Inc., a publicly traded long-distance telecommunications company, and
at various times between 1975 and April 1992 served as its Chairman, President
and Chief Executive Officer. Mr. Licklider is a founder and director of Pentium
Investments, Inc. and a director of Deckers Outdoor Corporation. He also serves
on the Board of Directors of The Children's Bureau of Southern California, Los
Angeles Youth Programs, Inc. and Marymount High School in Los Angeles,
California. 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.
Nanette Pattee Francini began developing sports and fitness clubs in
1977 and has served as our Executive Vice President and has been principally
responsible for overseeing all imaging/marketing activities since our inception
in 1994. Ms. Pattee Francini has been in the sports and fitness industry for
more than 20 years and has developed or participated in the development of more
than 25 sports and fitness clubs, including all the Clubs developed by The
Sports Club Company. She has been one of our Directors since 1994. Ms. Pattee
Francini holds a Bachelor of Arts Degree from the University of Arizona.
Timothy M. O'Brien was appointed as our Chief Financial Officer in
February 1995 and since June 1995 has also served as Assistant Secretary. From
July 1993 until February 1995, he was employed as Vice President/Controller of
WCT Communications, Inc., a publicly traded long-distance telecommunications
company. From May 1989 until July 1993, Mr. O'Brien was Controller for Com
Systems, Inc., a publicly traded long-distance telecommunications company. Mr.
O'Brien has a Bachelor of Business Administration degree from the University of
Wisconsin-Madison and is a Certified Public Accountant.
20
<PAGE> 39
Philip J. Swain was appointed Senior Vice President of Operations in
February 2000, having served as Vice President of Operations since our inception
in 1994. 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 20
sports and fitness clubs in the United States, including many of our current
Clubs.
Mark S. Spino was appointed Senior Vice President of Development in
February 2000, having served as our Vice President of Development since our
inception in 1994. Mr. Spino has been in the sports and fitness industry for
more than 20 years and has developed or participated in the development of more
than 20 sports and fitness clubs in the United States, including many of our
current Clubs. Mr. Spino holds a Bachelor of Arts and a Master of Arts degree in
physical education from the University of Southern California.
Brian J. Collins has been one of our Directors since 1997. Since
December 1996 Mr. Collins has served as Vice President and Chief Financial
Officer of Millennium Partners Management LLC, an affiliate of Millennium
Entertainment Partners L.P., which is a real estate developer of mixed use urban
entertainment projects. In June 1997 he became a principal of Millennium
Partners Management LLC and in June 1999 was named Chief Operating Officer. Mr.
Collins continues to serve as Chief Financial Officer of Lincoln 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. Mr. Collins holds a Bachelor of Arts Degree from
Colgate University and a Masters of Science from New York Graduate School of
Business. For so long as Millennium maintains at least a 12% interest in our
equity securities, we and certain of our stockholders have agreed with
Millennium to cause a nominee of Millennium to be appointed or elected to our
Board of Directors. Mr. Collins is currently serving as Millennium's nominee
pursuant to this agreement. See "Certain Relationships and Related
Transactions."
Andrew L. Turner has been a Director since 1994. He has also been
Chairman of the Board of Directors and Chief Executive Officer of Sun Healthcare
Group, Inc., a publicly traded long-term health care services provider, since
its formation in 1989. From 1986 to 1989, Mr. Turner served as Chief Operating
Officer of Horizon Health Care Corporation, a publicly traded health care
services provider. Mr. Turner is also a director of Watson Pharmaceuticals,
Inc., a publicly traded pharmaceutical manufacturing company.
Dennison T. Veru has been a Director since 1996. In March 2000, Mr. Veru
became Executive Vice President of Palisade Capital Management, LLC. From
November 1992 until December 1999, he served as President and director of
research of Awad & Associates, a money management division of Raymond James
Financial. From November 1990 to November 1992, Mr. Veru served as Executive
Vice President, Investments of Smith Barney, Inc., specializing in small and
medium capitalization stocks. He is a graduate of Franklin and Marshall College.
Directors who are not our employees receive an annual retainer fee of
$12,000, a fee of $1,000 for each Board and committee meeting attended and
reimbursement of expenses of attending Board and committee meetings. They also
receive an annual award of 2,000 shares of our Common Stock pursuant to our
Amended and Restated 1994 Stock Compensation Plan.
Our directors are divided into three classes having terms expiring at
the annual stockholders meetings in 2000 (Messrs. Talla and Licklider),
2001 (Messrs. Turner and Collins) and 2001 (Ms. Francini and Mr. Veru) or such
later dates as their successors are elected. At each annual meeting of
stockholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three-year terms and until their successors
are elected.
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. Collins, Turner and Veru, is
charged with reviewing our annual audit and meeting with our independent
auditors and reviewing our internal controls and financial management
21
<PAGE> 40
practices. The Compensation Committee, also composed of Messrs. Collins, Turner
and Veru, recommends to the Board of Directors compensation for key employees
and administers our 1994 Stock Incentive Plan (as amended and restated June 3,
1998).
CERTAIN TRANSACTIONS
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our officers and directors and persons who own more than ten percent of
a registered class of our equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission and to furnish
us with copies of such reports. Based on our review of the copies of those
reports and written representations which we have received, we believe that all
such filings required to be made during calendar 1999 have been made.
22
<PAGE> 41
ITEM 11. EXECUTIVE COMPENSATION
The table below shows, for the last three fiscal years, the amount of
compensation earned by the Co-Chief Executive Officer and the next five most
highly compensated executive officers (the "Named Executive Officers"). The
current salaries of such executive officers are described below under
"Employment Agreements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SHARES ALL OTHER
ANNUAL COMPENSATION UNDERLYING COMPENSATION
NAME & POSITION YEAR SALARY($)(a) BONUS($) OPTIONS AWARDS ($)(b)
- --------------- ---- ------------ -------- -------------- ------
<S> <C> <C> <C> <C> <C>
D. Michael Talla.......... 1999 243,000(c) 60,000 -- 3,168
Co-Chief Executive Officer 1998 243,000(c) 45,000 30,000 3,168
And Chairman of the Board 1997 239,250(c) -- -- 3,135
Nanette Pattee Francini... 1999 159,993 45,000 50,000 1,980
Executive Vice President 1998 154,800 35,000 30,000 825
And Director 1997 145,100 10,000 15,000 --
John M. Gibbons........... 1999 304,508(d) 55,000 -- 2,534
President, Chief Operating 1998 264,108(d) 42,000 30,000 2,534
Officer and Director 1997 245,883(d) 25,000 -- 2,637
(Resigned February 2000)
Mark S. Spino............. 1999 150,000 45,000 50,000 3,168
Senior Vice President of 1998 145,000 35,000 30,000 2,775
Development 1997 134,125 10,000 15,000 --
Philip J. Swain........... 1999 160,000 45,000 50,000 1,980
Senior Vice President of 1998 155,000 35,000 30,000 2,063
Operations 1997 146,031 15,000 15,000 908
Timothy M. O'Brien........ 1999 150,000 45,000 50,000 3,168
Chief Financial Officer 1998 146,300 35,000 30,000 3,168
and Assistant Secretary 1997 137,667 10,000 15,000 2,807
</TABLE>
- ----------
(a) Includes automobile allowance.
(b) Represents value of our Common Stock contributed for the benefit of the
Named Executive Officer, under the 401-K Profit Sharing Plan, based upon
the December 31 closing market price each year, on the American Stock
Exchange.
(c) Mr. Talla also receives, on an annual basis, 49.9% of the first $300,000
of The Sports Club/LA-Los Angeles' net cash flow. This amount is not
included in Mr. Talla's compensation. See "Certain Relationships and
Related Transactions."
(d) Includes an allowance for living expenses paid to Mr. Gibbons under the
terms of his employment agreement.
OPTION GRANTS, EXERCISES AND YEAR-END VALUES
The following table describes option grants to the Named Executive
Officers during the last fiscal year.
<TABLE>
<CAPTION>
% OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
SHARES GRANTED PRICE APPRECIATION FOR
UNDERLYING TO EXERCISE OPTION TERM(b)
OPTIONS EMPLOYEES PRICE EXPIRATION ----------------------
NAME GRANTED(#)(a) FOR 1999 ($/SH) DATE 5%($) 10%($)
- ---- ------------- -------- ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C>
D. Michael Talla......... -- -- -- -- -- --
Nanette Pattee Francini.. 50,000 23.81 3.9375 2/9/2009 123,815 313,770
John M. Gibbons.......... -- -- -- -- -- --
Mark S. Spino............ 50,000 23.81 3.9375 2/9/2009 123,815 313,770
Phillip J. Swain......... 50,000 23.81 3.9375 2/9/2009 123,815 313,770
Timothy M. O'Brien....... 50,000 23.81 3.9375 2/9/2009 123,815 313,770
</TABLE>
23
<PAGE> 42
- ----------
(a) All grants are incentive stock options granted under the terms of our
1994 Stock Incentive Plan (as amended and restated June 3, 1998), at
an exercise price equal to the fair market value of our Common Stock
on the date of grant. All of these options expire ten years from the
date of grant, and all of these options vest in 33 1/3% increments on
the first three anniversaries of the grant.
(b) The dollar amounts listed are the result of calculations at the 5% and
10% annual rates of stock appreciation prescribed by the SEC and are not
intended to forecast possible future appreciation, if any, of our Common
Stock. If our Common Stock does not appreciate, the Named Executive
Officers will receive no benefit from the options.
UNEXERCISED STOCK OPTIONS AND FISCAL YEAR-END OPTION VALUES
None of the Named Executive Officers exercised stock options during the
last fiscal year. The following table provides information with respect to
unexercised stock options outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL UNEXERCISED OPTIONS AT FISCAL
YEAR-END(a) YEAR-END(b)
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) ($) ($)
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Michael Talla........ 10,000 20,000 -- --
Nanette Pattee Francini. 35,000 75,000 17,812 --
John M. Gibbons......... 235,000 20,000 196,875 --
Mark S. Spino........... 35,000 75,000 17,812 --
Philip J. Swain......... 45,000 75,000 29,687 --
Timothy M. O'Brien...... 65,000 75,000 23,437 --
</TABLE>
- ----------
(a) All options were granted under our 1994 Stock Incentive Plan (as amended
and restated June 3, 1998).
(b) The in-the-money options had exercise prices of less than the $3.875,
the closing price of our Common Stock on the American Stock Exchange on
December 31, 1999. The calculations of value assume a fair market value
of our Common Stock on December 31, 1999 at the price of $3.875 per
share.
EMPLOYMENT AGREEMENTS
In August 1994, we entered into employment agreements with D. Michael
Talla, as Chief Executive Officer, and Nanette Pattee Francini, as Executive
Vice President, each of which, as renewed, 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 originally provided 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, Mr. Talla's salary was increased to $225,000 and in 1998,
Ms. Francini's annual salary was increased to $155,000. In February 2000, the
Compensation Committee of the Board of Directors recommended and the Board of
Directors concurred and increased Mr. Talla's annual salary to $250,000 and Ms.
Pattee Francini's annual salary to $200,000. We may terminate either employment
agreement for cause without penalty.
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. The employment agreements also include severance provisions which
entitle each executive officer to severance pay if his or her employment is
terminated by us without cause; if the employee dies or is disabled; or if the
employee terminates the agreement as a result of our material breach of our
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 (each, a "Change in Control") without the approval of a
majority of the Board of Directors: (i) the consolidation or merger of us with
any other corporation or other entity; (ii) the sale or other transfer of all or
substantially all of our the assets; (iii) the approval by our stockholders of a
plan of liquidation or dissolution; (iv) any person becomes the beneficial owner
directly or indirectly of 25% or more of our outstanding Common Stock; or (v) a
change
24
<PAGE> 43
occurs in the composition of a majority of our Board of Directors (unless
approved by two-thirds of our Board of Directors). 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 28OG 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 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 relocation of the executive
officer's place of employment, 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 two years following a Change in Control as a result of the
occurrence of any of the foregoing events (assuming that neither would be
entitled to any accrued bonus), the aggregate approximate amounts payable to Mr.
Talla and Ms. Pattee Francini would be $777,000 and $621,000, respectively.
Effective June 1, 1998, we entered into an employment agreement with Mr.
Gibbons which remained in effect until terminated as described below. The
agreement provided for an annual base salary of $250,000, subject to annual
review and upward adjustment at the discretion of the Board of Directors.
Additionally, Mr. Gibbons received $40,000 for living expenses each year and a
car allowance. The Board, in its discretion, could also award him a bonus. The
Board awarded Mr. Gibbons a bonus of $42,000 in 1998 (relating to services
provided in 1997) and a 1999 bonus of $55,000 (for services provided in 1998).
Effective February 11, 2000, Mr. Gibbons resigned from the Company and
we entered into a Separation from Employment Agreement pursuant to which Mr.
Gibbons is to receive a payment of $250,000 prorated over a twelve-month period.
Our obligation to make such monthly payments terminates should Mr. Gibbons
accept employment with, consult with or advise certain of our competitors.
Additionally, the Board in its discretion awarded Mr. Gibbons a bonus of
$70,000.
We do not have written employment agreements with Messrs. Spino, Swain
and O'Brien, who each currently receive annual base salaries of $200,000.
COMPENSATION OF DIRECTORS
Non-employee directors are entitled to receive an annual fee of $12,000
and a fee of $1,000 for each meeting attended. Non-employee directors who are
members of the Audit Committee or Compensation Committee are entitled to receive
$1,000 for each meeting they attend. In addition, non-employee directors receive
2,000 shares of our Common Stock each year pursuant to our Amended and Restated
1994 Stock Compensation Plan. Messrs. Licklider, Collins, Turner and Veru
currently serve on the Board as non-employee directors. Mr. Licklider is
currently serving as Co-Chief Executive Officer without compensation and
continues to receive amounts due to non-employee directors. We provide Mr.
Licklider with health insurance under our 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 $48,783
during 1997, $53,320 during 1998 and $69,240 during 1999. Under the Amended and
Restated 1994 Stock Compensation Plan an aggregate of 24,000 shares of Common
Stock were issued to non-employee directors through December 31, 1999.
COMPENSATION OF COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board ("Committee") administers the
executive compensation. Mr. Turner has been a member of the Committee since
September 13, 1994, and became its
25
<PAGE> 44
Chairman on February 27, 1995. Mr. Veru was appointed to the Committee on
February 20, 1996, and Mr. Collins was appointed on April 10, 1998. None of
these individuals has ever been an officer or employee.
26
<PAGE> 45
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the shares of our Common Stock beneficially
owned as of March 10, 2000 by our directors and Executive Officers. It also
shows other individuals or entities that beneficially owned more than 5% of the
17,731,753 outstanding shares of our Common Stock.
<TABLE>
<CAPTION>
SHARES OPTIONS SHARES HELD TOTAL AND PERCENT OF
NAME AND ADDRESS OWNED EXERCISABLE UNDER STOCK OUTSTANDING
OF BENEFICIAL OWNER(a) DIRECTLY(b) WITHIN 60 DAYS(c) 401-K PLAN(d) NUMBER PERCENT
---------------------- ----------- ----------------- ------------- ------ -------
<S> <C> <C> <C> <C> <C>
D. Michael Talla(e) ........ 4,726,815 20,000 1,144 4,747,959 26.78%
Nanette Pattee Francini(e).. 256,107 66,667 210 322,984 26.78%
Mark S. Spino(e) ........... 227,969 66,667 705 295,341 26.78%
Philip J. Swain(e) ......... 163,164 76,667 622 240,453 26.78%
Voting Trust(e) ............ 5,374,055 -- -- 5,606,737 31.62%
John M. Gibbons ............ 90,500 245,000 1,712 337,212 1.90%
Timothy O'Brien ............ 3,000 96,667 865 100,532 *
The Licklider Living Trust
Dated May 2, 1986 ........ 1,391,862 -- -- 1,391,862 7.85%
Andrew L. Turner ........... 77,000 -- -- 77,000 *
Dennison T. Veru ........... 25,000 -- -- 25,000 *
Brian J. Collins ........... 35,001 -- -- 35,001 *
All Directors and Executive
Officers as a Group
(10 persons) ............. 6,996,418 571,668 5,258 7,573,344 42.71%
Millennium(f) .............. 4,912,613 -- -- 4,912,613 27.71%
Baron Capital Group, Inc.(g) 1,292,500 -- -- 1,292,500 7.29%
</TABLE>
- ----------
* Less than 1%
(a) The address of all directors and executive officers is c/o The Sports
Club Company, Inc. at 11100 Santa Monica Blvd., Suite 300, Los Angeles,
California 90025.
(b) Includes shares for which the named person is considered the owner
because:
1. the named person has sole voting and investment power,
2. the spouse has voting and investment power, or
3. the shares are held by other members of the immediate family.
(c) Includes shares that can be acquired through stock option exercises
through May 8, 2000.
(d) Does not include 1999 matching shares that will be issued in 2000.
(e) Named persons share voting power pursuant to a voting agreement that
requires each party to vote his or her 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 shares of
our Common Stock subject to the agreement. The parties to the voting
agreement in effect each control the voting of all shares held by the
parties to the agreement and under SEC rules are deemed beneficial
owners of the shares subject to the agreement. The total number of
shares of our Common Stock held by the parties without giving effect to
beneficial ownership resulting from the voting agreement is:
<TABLE>
<CAPTION>
SHARES TOTAL SHARES
HELD HELD
NAMED PERSON DIRECTLY (SEE ABOVE TABLE)
------------ -------- -----------------
<S> <C> <C>
D. Michael Talla:
Individually .................. 4,556,434
Spouse ........................ 30,953
Trusts for two minor children . 139,428
Total ...................... 4,726,815
Nanette Pattee Francini ............ 256,107
Mark S. Spino ...................... 227,969
Philip J. Swain .................... 163,164
---------
All Parties to Voting Agreement 5,374,055
</TABLE>
27
<PAGE> 46
(f) The Millennium shares are held by the following affiliates:
<TABLE>
<CAPTION>
SHARES HELD
-----------
<S> <C>
Millennium Partners LLC............................. 2,253,863
Millennium Development Partners L.P................. 978,900
MDP Ventures I LLC.................................. 72,100
MDP Ventures II LLC................................. 982,750
Millennium Entertainment Partners L.P............... 625,000
-----------
4,912,613
</TABLE>
The address of all such entities is c/o Millennium Partners Management
LLC, 1995 Broadway, New York, New York, 10023.
(g) The "Number of Shares Beneficially Owned" is based on information
contained in a report on Schedule 13F by Baron Capital Group, Inc. (and
affiliates) on file with the SEC as of December 31, 1999. Baron Capital
Group, Inc. is a registered investment advisor located at 767 Fifth
Avenue, New York, NY 10153.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From time to time we have entered into transactions with our officers,
directors and stockholders. We believe that each of the following transactions
has been on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All transactions between us and any of our directors
or officers are subject to the approval of the disinterested directors.
Messrs. Talla and Licklider. We have a 50.1% interest in the partnership
that owns The Sports Club/LA in Los Angeles and Mr. Talla beneficially owns the
remaining 49.9%. The partnership agreement provides that, on an annual basis,
the partners will share in the first $300,000 of the Club's net cash flow in
proportion to their percentage interests. The next $35.0 million of net cash
flow will be distributed to us. All distributions of net cash flow thereafter,
if any, will be made to the partners in proportion to their percentage
interests. Under certain circumstances, we have an option to purchase Mr.
Talla's interest in the partnership for an amount equal to four times the amount
of his most recent annual distribution from the partnership.
In January 1998, Messrs. Talla and Licklider purchased a 7,000 square
foot parcel of land adjacent to property owned and used by The Sports Club/LA in
Los Angeles. In February 1999, we acquired the property from them for $637,422,
such price being equal to the purchase price paid by Messrs. Talla and
Licklider, minus rental income received by them, plus an interest credit on
their investment at an annual rate of 6.56%. The acquired property is currently
leased to a non-affiliated third party.
In September 1999, we sold the property on which our the Spectrum Club
- -- Thousand Oaks is located for a purchase price of $12.0 million. Under the
terms of the sale, the sum of $10.0 million was paid at the close of the sale
and the remaining $2.0 million will be paid upon the fulfillment of certain
conditions by us. We entered into a sale and leaseback agreement for the
property under a long-term lease with an initial annual base rent of $1.1
million, until such time as we receive the final $2.0 million of the purchase
price, at which time the annual rent will increase to $1.3 million. The Thousand
Oaks property consists of the Spectrum Club -- Thousand Oaks, unimproved office
space and a parking area. We are currently subleasing the Spectrum Club space to
another club operator. Mr. Licklider owns approximately a 4.6% interest in the
purchaser of the property and trusts for the benefit of Mr. Talla's minor
children own approximately a 5.2% interest in the purchaser of the property.
Millennium. Millennium is a partner in the Reebok-Sports Club/NY
partnership as well as the landlord of the building in which Reebok Sports
Club/NY is located. 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.
In June 1997, we issued to Millennium 2,105,263 shares of our 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
28
<PAGE> 47
by the partnership. We also granted to Millennium certain registration and
preemptive rights regarding its shares. In addition, for so long as Millennium
maintains at least a 12% interest in our equity securities, we and certain of
our stockholders have agreed to cause a nominee of Millennium to be appointed or
elected to the Board of Directors. Pursuant to this agreement Brian J. Collins,
an officer of Millennium, is currently serving as a member of our Board of
Directors.
In December 1997, we sold 625,000 shares of Common Stock to Millennium
for $5.0 million, which we used to fund the cash portion of the acquisition of
four Spectrum Clubs. In addition, Millennium acquired properties underlying two
of the Clubs for $10.0 million and leased these properties to us under a
financing lease agreement. The lease had a term of twenty years, and provided
for an annual rent of $1.0 million for the first ten years and $1.2 million per
year thereafter. In 1999, we purchased the leased property from Millennium for a
price equal to $10.3 million.
We have entered into leases with Millennium relating to Sports Clubs to
be developed in San Francisco, Washington D.C. and Boston. The leases for the
San Francisco and Washington D.C. developments provide for base rental payments
of $3.0 million per year, for a term of 20 years, and for three 14 year renewal
options. In addition, once we have received a management fee equal to 6% of all
revenues, an amount equal to our investment in the Club plus an 11% annual
return on our investment and an additional distribution sufficient to reduce our
average base rental payment for each club to $2.75 million per year, Millennium
is entitled to receive 20% of all additional cash flows from each Club as
additional rent. The lease for the Boston development has similar terms, except
that the base rental payment is $2.75 million per year. We expect each of the
Clubs to be approximately 100,000 square feet.
29
<PAGE> 48
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements filed as part of this Report are listed in
Item 8 of this Report.
(2) No financial schedules have been included because they are not
applicable, not required or because required information is
included in the consolidated financial statements or notes
thereto.
(3) The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
3.3 Amendment to Bylaws dated February 1, 1995.**
4.1 Specimen Common Stock Certificate.*
4.2 Rights Agreement by and between the Registrant and American Stock
Transfer & Trust dated as of October 6, 1998.++
4.3 First Amendment to Rights Agreement by and between the
Registrant and American Stock Transfer & Trust entered into as
of February 18, 1999.+++
4.4 Indenture by and among Registrant, U.S. Bank Trust National
Association and the Subsidiary Guarantors referred to therein,
dated as of April 1, 1999.++++
4.5 Registration Rights Agreement by and among the Registrant,
Jeffries & Company, Inc. and CIBC Oppenheimer Corp., dated as of
April 1, 1999.++++
4.6 Purchase Agreement by and among the Registrant, Jeffries &
Company, Inc. and CIBC Oppenheimer Corp., dated March 29,
1999.++++
4.7 Second Amendment to Rights Agreement entered into as of the
second day of July 1999.
9.1 Voting Agreement among D. Michael Talla, Nanette Pattee
Francini, Mark S. Spino, Peter Feinstein, Philip J. Swain and FP
II.*
10.1 1994 Stock Incentive Plan.*#
10.2 Form of Stock Option Agreement.*#
10.3 Form of Stock Purchase Agreement.*#
10.4 1994 Stock Compensation Plan.*#
10.5 Form of Indemnification Agreement between the Registrant and its
directors and certain officers.*
10.6 Indemnification Agreement between the Registrant and D. Michael
Talla.*
</TABLE>
30
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
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 Lease of premises for Reebok Sports Club/NY located at 160
Columbus Avenue, New York 10023 dated June 3, 1992.*
10.11 Joint Venture Agreement for Sports Connection - ES/MB between El
Segundo-TDC, Ltd. and Continental El Segundo Corporation
effective as of January 3, 1986.*
10.12 First Amendment to Joint Venture Agreement for Sports Connection
- ES/MB dated January 3, 1986.*
10.13 Restated Agreement of Limited Partnership of El Segundo-TDC,
Ltd., as amended.*
10.14 Management Agreement effective as of June 3, 1992, between
R-SC/NY, Ltd. And Pontius Realty, Inc.*
10.15 License Agreement between Reebok Fitness Centers, Inc. and
R-SC/NY, Ltd. Dated June 3, 1992.*
10.16 Letter Agreement regarding R-SC/NY dated June 3, 1992.*
10.17 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.*
10.18 Memorandum of Agreement between Reebok Fitness Centers, Inc. and
the Company dated as of June 3, 1992.*
10.19 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.*
10.20 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.*
10.21 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 Cub, Ltd., a California Limited Partnership.*
10.22 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.*
10.23 First Amended and Restated Agreement of Limited Partnership of
Reebok-Sports Club/NY, Ltd. Dated as of October 12, 1994.*
10.24 Letter Agreement by and between Reebok Fitness Centers, Inc. and
the Company dated October 12, 1994.*
</TABLE>
31
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.25 Amendment to First Amended and Restated Agreement of Limited
Partnership of Reebok-Sports Club/NY, Ltd. dated as of October
12, 1994.*
10.26 Letter Agreement by and between Reebok Fitness Centers, Inc. and
the Company, which became effective on October 29, 1994.*
10.27 License Agreement by and between Reebok Fitness Centers, Inc.
and the Company, which became effective on October 20, 1994.*
10.28 401-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.**
10.29 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.**
10.30 Letter Agreement between Millennium Entertainment Partners, L.P.
and the Registrant dated as of March 13, 1997.**
10.31 First Amendment to Option Agreement between D. Michael Talla and
TTO Partners dated May 27, 1997.***
10.32 Modification to the March 13, 1997 letter between Millennium
Entertainment Partners, L.P. and the Registrant dated June 10,
1997.***
10.33 Asset Purchase Agreement between Green Valley Athletic Club
Limited Partnership and the Registrant dated as of May 1,
1997.***
10.34 Agreement of Purchase and Sale of Real Property between Green
Valley Investment Company, Inc., and the Registrant dated as of
May 1, 1997.***
10.35 Agreement for Purchase and Sale of Assets by and among HFA
Services, Inc., SportsTherapy, Inc. and Larry Schwartz made as
of July 1, 1997.***
10.36 Letter Agreement between Millennium Entertainment Partners, L.P.
and the Registrant dated December 29, 1997.+
10.37 Agreement of Purchase and Sale between The Spectrum Club
Company, Inc. and Norcan dated as of December 31, 1997.+
10.38 Amendment of Lease between Lincoln Metrocenter Partners, L.P.
and Reebok-Sports Club/NY Ltd. As of January 31, 1998.***
10.39 Lease Agreement between RCPI Trust and the Registrant as of
February 27, 1998.****
10.40 Amended and Restated Net Operating Lease among Hirschfeld Realty
Club Corporation and 328 E. 61 Corp., and Vertical Fitness and
Racquet Club, Ltd., dated March 26, 1985.****
10.41 Lease Modification Agreement by and among Hirschfeld Realty
Corporation and 328 E. 61 Corp., and Vertical Fitness and
Racquet Club, Ltd., dated July 1, 1990.****
</TABLE>
32
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.42 Assignment and Assumption of Lease by and between Vertical
Fitness and Racquet Club, Ltd., and Bally Entertainment
Corporation dated January 8, 1996.****
10.43 Assignment of Lease executed by Hilton Hotels Corporation, as
successor to tenant, and agreed to and accepted by the
Registrant, dated April 15, 1998.****
10.44 Second Amendment to Amended and Restated Net Operating Lease by
and among Hirschfeld Realty Club Corporation and 328 E. 61
Corp., and the Registrant dated April 15, 1998.****
10.45 Letter Agreement among the Registrant and Rex A. Licklider and
D. Michael Talla dated March 31, 1998.****
10.46 Asset Purchase Agreement between Hilton Hotels Corporation and
RM Sports Club, Inc. dated as of April 1, 1998.****
10.47 Assignment and Assumption of Asset Purchase Agreement between RM
Sports Club, Inc. and the Registrant entered into as of April 1,
1998.****
10.48 Note Payable issued by the Registrant to Hilton Hotels
Corporation dated April 15, 1998.****
10.49 Instructions for Purchase of Real Estate in Houston, Texas dated
March 5, 1998.****
10.50 Amended and Restated 1994 Stock Incentive Plan as of June 2,
1998.#****
10.51 Second Amended and Restated Loan Agreement among the Registrant
and certain of its subsidiaries, Sumitomo Bank of California and
Comerica Bank - California dated as of June 9, 1998.****
10.52 Third Amendment to Amended and Restated Loan Agreement among the
Registrant and certain of its subsidiaries, California Bank &
Trust and Comerica Bank - California dated as of January 11,
1999.****
10.53 Third Amended and Restated Loan Agreement between the Registrant
and certain of its subsidiaries and Comerica Bank - California
dated as of February 1, 1999.****
10.54 First Amendment to Third Amended and Restated Loan Agreement
between the Registrant and certain of its subsidiaries and
Comerica Bank - California dated as of February 1, 1999.****
10.55 Employment Agreement between the Registrant and John Gibbons
dated October 16, 1998.#****
10.56 Settlement Agreement and Mutual Release among the Registrant, RM
Sports Club, Inc. and Bally Total Fitness Holding Corporation
made as of December 31, 1998.****
10.57 Letter Agreement between the Registrant and Millennium Partners
LLC dated as of October 27, 1998.****
10.58 Participation Agreement between the Registrant and Millennium
Partners LLC, dated as of October 27, 1998.****
</TABLE>
33
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
10.59 First Amendment to Lease between RCPI Trust and the Registrant
dated October 30, 1998.****
10.60 Second Amendment to Lease between RCPI Trust and the Registrant
dated March 4, 1999.****
10.61 Lease between CB-1 Entertainment Partners LP and S.F. Sports
Club, Inc. dated June 1, 1997.****
10.62 Lease between 2200 M Street LLC and Washington D.C. Sports Club,
Inc. dated March 1999.****
10.63 Fourth Amended and Restated Loan Agreement by and among the
Registrant, certain of its subsidiaries and Comerica
Bank-California, dated April 1, 1999.++++
10.64 Intercreditor Agreement by and among the Registrant, certain of
its subsidiaries, Comerica Bank-California and U.S. Bank Trust
National Association, dated April 1, 1999.++++
10.65 Disbursement Agreement between U.S. Bank Trust National
Association and the Registrant and certain of its subsidiaries
dated as of April 1, 1999.++++
10.66 Stock Purchase Agreement dated September 16, 1999 by and among
Racquetball and Fitness Clubs, Inc., The Spectrum Club Company,
Inc., Canoga Agoura Spectrum Club, Inc., Spectrum Club, Inc.,
Spectrum Club Anaheim, El Segundo - TDC, Ltd., TVE, Inc. and the
Registrant.+++++
10.67 Amendment #1 to the Stock Purchase Agreement dated September 16,
1999 by and among Racquetball and Fitness Clubs, Inc., The
Spectrum Club Company, Inc., Canoga Agoura Spectrum Club, Inc.,
Spectrum Club Anaheim, El Segundo - TDC, Ltd., TVE, Inc. and the
Registrant.+++++
10.68 Amended and Restated 1994 Stock Compensation Plan.#
10.69 Lease Agreement as of September 24, 1999 between The Spectrum
Club Company, Inc. and West Hollywood Property Limited
Partnership and 2400 Willow Lane Associates Limited Partnership.
10.70 Lease Agreement as of November 5, 1999 by and between New
Commonwealth Center Limited Partnership and Washington D.C.
Sports Club, Inc.
10.71 Separation from Employment Agreement made as of February 11,
2000 by and between the Registrant and John M. Gibbons.#
10.72 Letter Agreement dated March 11, 1999 amending the October 27,
1998 Letter Agreement between the Registrant and Millennium
Partners, LLC.
10.73 Settlement Agreement and Mutual Release entered November 16,
1999 between OTR, the Registrant and Spectrum Liquidating Corp.
10.74 Amendment adopted November 4, 1999 to the Registrant's 1994
Stock Incentive Plan.#
10.75 Amendment adopted February 9, 2000 to the Registrant's 401(k)
Profit Sharing Plan.
</TABLE>
34
<PAGE> 53
<TABLE>
<S> <C>
10.76 Certificate representing Series "B" Senior Secured Notes.
10.77 First Amendment to Fourth Amended and Restated Loan Agreement
among the Registrant and certain of its subsidiaries and
Comerica Bank - California as of December 3, 1999.
10.78 Form of The Sports Club Membership Agreements.
10.79 Transition Services Agreement made as of December 3, 1999 by and
among the Registrant and Racquetball & Fitness Clubs, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
</TABLE>
- -------------
# Compensation agreement of plan.
* Incorporated by reference to the Registrant's Registration Statement of
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/A, filed with the Securities and Exchange Commission on October 14,
1997 (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 February 26,
1998 (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 25,
1999 (SEC file No. 1-13290).
+ Incorporated by reference to the Registrant's Form 8-K, filed with the
Securities and Exchange Commission on January 15, 1998 (SEC file No.
1-13290).
++ Incorporated by reference to the Registrant's Form 8-K, filed with the
Securities and Exchange Commission on October 6, 1998 (SEC file No.
1-13290).
+++ Incorporated by reference to the Registrant's Form 8-K, filed with the
Securities and Exchange Commission on March 15, 1999 (SEC file No.
1-13290).
++++ Incorporated by reference to the Registrant's Form 8-K, filed with the
Securities and Exchange Commission on April 14, 1999 (SEC file No.
1-13290).
+++++ Incorporated by reference to the Registrant's Form 8-K, filed with the
Securities and Exchange Commission on October 5, 1999 (SEC file No.
1-13290).
(b) Reports on Form 8-K
The following reports on Form 8-K were filed from October 1, 1999
through the date of this report.
<TABLE>
<CAPTION>
DATE EVENT
---- -----
<S> <C>
October 5, 1999 Announced that an agreement has been
reached to sell the Spectrum Clubs to an
investment group.
December 16, 1999 Announced the sale of the Spectrum
</TABLE>
35
<PAGE> 54
<TABLE>
<S> <C>
Clubs to an investment group.
February 11, 2000 Reported pro forma financial information
required by Article 11 of Regulation S-X
regarding the sale of the Spectrum Clubs.
February 23, 2000 1) Announced the resignation of John M.
Gibbons as President, Chief Executive
Officer and a director and named D.
Michael Talla and Rex A. Licklider as
interim Co-Chief Executive Officers.
2) Announced the opening of New York's The
Sports Club/LA at Rockefeller Center.
</TABLE>
(c) Exhibits
Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
4.7 Second Amendment to Rights Agreement entered into as of the
second day of July 1999.
10.68 Amended and Restated 1994 Stock Compensation Plan.#
10.69 Lease Agreement as of September 24, 1999 between The Spectrum
Club Company, Inc. and West Hollywood Property Limited
Partnership and 2400 Willow Lane Associates Limited Partnership.
10.70 Lease Agreement as of November 5, 1999 by and between New
Commonwealth Center Limited Partnership and Washington D.C.
Sports Club, Inc.
10.71 Separation from Employment Agreement made as of February 11,
2000 by and between the Registrant and John M. Gibbons.#
10.72 Letter Agreement dated March 11, 1999 amending the October 27,
1998 Letter Agreement between the Registrant and Millennium
Partners, LLC.
10.73 Settlement Agreement and Mutual Release entered November 16,
1999 between OTR, the Registrant and Spectrum Liquidating Corp.
10.74 Amendment adopted November 4, 1999 to the Registrant's 1994
Stock Incentive Plan.#
10.75 Amendment adopted February 9, 2000 to the Registrant's 401(k)
Profit Sharing Plan.
10.76 Certificate representing Series "B" Senior Secured Notes.
10.77 First Amendment to Fourth Amended and Restated Loan Agreement
among the Registrant and certain of its subsidiaries and
Comerica Bank - California as of December 3, 1999.
10.78 Form of The Sports Club Membership Agreements.
10.79 Transition Services Agreement made as of December 3, 1999 by and
among the Registrant and Racquetball & Fitness Clubs, Inc.
</TABLE>
36
<PAGE> 55
<TABLE>
<S> <C>
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
</TABLE>
- ------------------
# Compensation agreement or plan.
37
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, on the 28th
day of March, 2000.
THE SPORTS CLUB COMPANY, INC.
/s/ D. Michael Talla
------------------------------------
D. Michael Talla,
Co-Chief Executive Officer
/s/ Rex A. Licklider
------------------------------------
Rex A. Licklider
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant, in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ D. Michael Talla Chairman of the Board March 28, 2000
- -------------------------------------------- and Co-Chief Executive Officer
D. Michael Talla
/s/ Rex Licklider Vice Chairman of the Board March 28, 2000
- -------------------------------------------- and Co-Chief Executive Officer
Rex A. Licklider
/s/ Timothy M. O'Brien Chief Financial Officer March 28, 2000
- -------------------------------------------- (Principal Financial and Accounting
Timothy M. O'Brien Officer)
/s/ Brian J. Collins Director March 28, 2000
- --------------------------------------------
Brian J. Collins
/s/ Nanette Pattee Francini Director March 28, 2000
- --------------------------------------------
Nanette Pattee Francini
/s/ Andrew L. Turner Director March 28, 2000
- --------------------------------------------
Andrew L. Turner
/s/ Dennison Veru Director March 28, 2000
- --------------------------------------------
Dennison Veru
</TABLE>
38
<PAGE> 1
EXHIBIT 4.7
Second Amendment to Rights Agreement
dated July 2, 1999
<PAGE> 2
SECOND AMENDMENT TO RIGHTS AGREEMENT
This Second Amendment to Rights Agreement is made and entered into as of
the 2nd day of July, 1999, and amends that certain agreement entered into by and
between The Sports Club Company, Inc., a Delaware corporation (the "Company"),
and American Stock Transfer & Company, a New York corporation (the "Rights
Agent"), dated as of October 6, 1998, as amended by the First Amendment to
Rights Agreement dated as of February 18, 1999 (the "Rights Agreement").
Capitalized terms used but not defined herein shall have the meanings ascribed
to such terms in the Rights Agreement.
R E C I T A L S
WHEREAS, the Board of Directors of the Company (the "Board") on
September 29, 1998 authorized and declared a dividend of one preferred share
purchase right for each Common Share of the Company outstanding on October 6,
1998, each Right representing the right to purchase one five-hundredth of a
Preferred Share upon the terms and subject to the conditions set forth in the
Rights Agreement, and further authorized and directed the issuance of one Right
with respect to each Common Share that shall become outstanding between the
Record Date and the earliest of the Distribution Date, the Redemption Date or
the Expiration Date;
WHEREAS, the Company and the Rights Agent entered into the Rights
Agreement as of October 6, 1998;
WHEREAS, the Rights Agreement was amended by the First Amendment to
Rights Agreement as of February 18, 1999;
WHEREAS, it has been proposed that the Company amend the Rights
Agreement as set forth herein;
WHEREAS, the Board has determined that it is in the best interests of
the Company and its stockholders to amend the Rights Agreement as set forth
herein;
<PAGE> 3
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual
agreements set forth herein, the parties hereto hereby agree as follows:
1. The definition of "Excluded Shares" set forth in Section 1 of the
Rights Agreement is hereby deleted and replaced in its entirety with the
following:
"Excluded Shares" shall mean the following Voting Shares: (a)
with respect to all Stockholders, Common Shares acquired: (i) by a bona
fide gift; (ii) as the result of the death of a Person, pursuant to a
will or the laws of descent; or (iii) upon the exercise of any stock
option granted by the Company to an employee, officer or director of the
Company, and (b) with respect to Millennium, all Common Shares subject
to the Pledge Agreement to the extent transferred and assigned to
Millennium in accordance with the terms of the Pledge Agreement or by
exercise of statutory rights, as well as all rights of Millennium under
the Pledge Agreements.
2. The definition of "15% Ownership Date" set forth in Section 1 of the
Rights Agreement is hereby deleted and replaced in its entirety with the
following:
"28% Ownership Date" shall mean the first date of public
announcement (which, for the purpose of this definition, shall include,
without limitation, a report filed pursuant to Section 13(d) of the
Exchange Act) by the Company or a 28% Stockholder after the Declaration
Date disclosing the facts by virtue of which a Person has become a 28%
Stockholder.
3. The definition of "15% Stockholder" set forth in Section 1 of the
Rights Agreement is hereby deleted and replaced in its entirety with the
following:
"28% Stockholder" shall mean any Person that Beneficially Owns
28% or more of the Voting Shares then outstanding; provided, however,
that the term "28% Stockholder" shall not include:
(i) an Exempt Person;
(ii) any Person that would not otherwise Beneficially Own 28%
or more of the Voting Shares then outstanding but for a
reduction in the number of outstanding Voting Shares
resulting from an acquisition, split or retirement of
Voting Shares by the Company commenced after July 2,
1999; provided, however, that the term "28% Stockholder"
shall include such Person from and after the first date
upon which (A) such Person, since the date of the
acquisition, split or retirement of Voting Shares which
results in such Person Beneficially Owning 28% or more
of the outstanding Voting Shares then outstanding, shall
have acquired Beneficial Ownership of one or more
additional Voting Shares, other than the Excluded
Shares, and (B) such Person, together with all
Affiliates and Associates of such Person, shall
Beneficially Own 28% or more of the Voting Shares of the
Company then outstanding;
(iii) any Person that would not otherwise be a 28% Stockholder
but for its ownership of Rights; or
(iv) as determined in good faith by the Board of Directors of
the Company, any Person that became the Beneficial Owner
of a number of Voting Shares such that the Person would
otherwise qualify as a 28% Stockholder inadvertently
(including, without limitation, because (A) such Person
was unaware that it Beneficially Owned a percentage of
Voting Shares that would otherwise cause such Person to
be a 28% Stockholder or (B) such Person was aware of the
extent of its Beneficial Ownership of Voting Shares but
had no actual
<PAGE> 4
knowledge of the consequences of such Beneficial
Ownership under the Agreement) and such Person had no
intention of changing or influencing control of the
Company, unless and until such Person shall have failed
to divest itself, within twenty (20) Business Days after
notice from the Board of Directors of the Company, of
Beneficial Ownership of a sufficient number of Voting
Shares so that such Person would no longer otherwise
qualify as a 28% Stockholder.
In calculating the percentage of the outstanding Voting Shares
that are Beneficially Owned by a Person for purposes of this
definition, Voting Shares that are Beneficially Owned by such
Person shall be deemed outstanding, and Voting Shares that are
not Beneficially Owned by such Person and that are subject to
issuance upon the exercise or conversion of outstanding
conversion rights, exchange rights, rights, warrants or options
shall not be deemed outstanding. Any determination made by the
Board of Directors of the Company as to whether any Person is or
is not a 28% Stockholder shall be conclusive and binding upon
all holders of Rights.
4. The definition of "Millennium" set forth in Section 1 of the Rights
Agreement is hereby deleted and replaced in its entirety with the following:
"Millennium" shall mean Millennium Partners LLC, Millennium
Entertainment Partners LP, Millennium Development Partners LP, MDP
Ventures I, LLC and MDP Ventures II, LLC and their respective Affiliates
and Associates, and Brian J. Collins and his Affiliates and Associates.
5. The definition of "Pledge Agreements" set forth in Section 1 of the
Rights Agreement is hereby deleted and replaced in its entirety with the
following:
"Pledge Agreement" shall mean the Amended and Restated Loan and
Stock Pledge Agreement, dated as of December 30, 1997, by and between
Talla and MDP Ventures II, LLC, as such agreement may be amended or
modified from time to time; provided that the number of Common Shares
pledged thereunder shall not exceed two million shares (excluding any
Common Shares issued in respect of such Common Shares as a result of a
stock split, stock dividend, recapitalization or other reorganization
affecting the Common Shares).
6. There is hereby added to the definition of "Beneficial Owner" set
forth in Section 1 of the Rights Agreement the following:
Notwithstanding anything to the contrary in this Section 1, a Person
shall not be deemed to be the Beneficial Owner of, or to Beneficially
Own, any securities solely as a result of being a party to the agreement
dated March 31, 1997, by and among the Company, Millennium, Rex A.
Licklider and Talla, which provides that Messrs. Licklider and Talla
shall vote their Voting Shares to elect a nominee of Millennium to the
Board of Directors of the Company.
7. All references to "15% Stockholder" and "15% Ownership Date" in the
Rights Agreement are hereby amended to read "28% Stockholder" and "28% Ownership
Date", respectively.
8. Except as amended hereby, the Rights Agreement remains in full force
and effect.
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
THE SPORTS CLUB COMPANY, INC.
Attest:
By /s/ Lois Barberio By /s/ John M. Gibbons
-------------------------------- -------------------------------
Name: Lois Barberio Name: John M. Gibbons
Title: Secretary Title: Chief Executive Officer
And President
Attest:
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By /s/ ISACC J. KAGAN By /s/ Herbert J. Lemmer
-------------------------------- -------------------------------
Name: ISAAC J. KAGAN Name: Herbert J. Lemmer
Title: VICE PRESIDENT Title: Vice President
<PAGE> 1
EXHIBIT 10.68
Amended and Restated 1994 Stock Compensation Plan
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
AMENDED AND RESTATED
1994 STOCK COMPENSATION PLAN
Article 1
GENERAL PURPOSE OF PLAN
The name of this plan is The Sports Club Company, Inc. 1994 Stock Compensation
Plan (the "Plan"). The purpose of the Plan is to enable The Sports Club Company,
Inc. (the "Company") to obtain and retain the services of the types of
non-employee Directors who will contribute to the Company's long range success
and to provide for incentives that are linked directly to increases in share
value which will inure to the benefit of all shareholders of the Company.
Article 2
DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
"Administrator" shall have the meaning as set forth in Article 3.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time, or any successor thereto.
"Committee" means a committee of at least two Disinterested Persons
appointed by the Board to administer the Plan.
"Company" means The Sports Club Company, Inc., a corporation organized
under the laws of the State of Delaware (or any successor corporation).
"Director" means a member of the Board.
"Eligible Person" means any Director of the Company that is not an
employee of the Company or any subsidiary of the Company.
"Grant Date" means November 15 of each year of the Plan.
"Grantee" means an Eligible Person who is granted stock pursuant to the
Plan.
"Plan" means The Sports Club Company, Inc. 1994 Stock Compensation Plan,
as the same may be amended or supplemented from time to time.
<PAGE> 3
"Stock" means the Common Stock, par value $0.01 per share, of the
Company.
Article 3
ADMINISTRATION
3.1 The Administrator.
(a) Administrator. The Plan shall be administered by either (i)
the Board; or (ii) such person or persons appointed by the Board (the person or
group that administers the Plan is referred to as the "Administrator").
(b) Powers in General. The Administrator shall have the power
and the authority to grant stock to Eligible Persons, pursuant to the terms of
the Plan.
(c) Specific Powers. In particular, the Administrator shall have
the authority: (i) to construe and interpret the Plan and apply its provisions;
(ii) to promulgate, amend and rescind rules and regulations relating to the
administration of the Plan; (iii) to authorize any person to execute, on behalf
of the Company, any instrument required to carry out the purposes of the Plan;
and (iv) to make any and all other determinations which it determines to be
necessary or advisable for administration of the Plan.
Article 4
STOCK SUBJECT TO PLAN
4.1 Subject to adjustment as provided in Article 8, the total number of
shares of Stock reserved and available for issuance under the Plan shall be
50,000 shares.
Article 5
ELIGIBILITY
5.1 Each Director of the Company who is an Eligible Person, shall be
eligible to be granted Stock hereunder subject to limitations set forth in this
Plan.
Article 6
STOCK GRANT
6.1 2,000 shares of Stock shall be granted to each Eligible Person on
each Grant Date.
<PAGE> 4
Article 7
AMENDMENT AND TERMINATION
7.1 The Board may amend, alter or discontinue the Plan, but not more
than once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended, or the rules
thereunder, but no amendment, alteration or discontinuation shall be made which
without the approval of shareholders would:
(a) materially increase the benefits accruing to Eligible
Persons under the Plan;
(b) materially increase the total number of shares of Stock
reserved for the purposes of the Plan; or
(c) materially modify the requirements for eligibility under the
Plan.
Article 8
CHANGES IN CAPITALIZATION; SPLITS; LIQUIDATIONS, MERGERS AND REORGANIZATIONS
8.1 Stock Splits. The aggregate shares of Stock that may be granted to
Eligible Persons under the Plan may be proportionately adjusted by the
Administrator for any increase or decrease in the number of issued shares of
Stock of the Company resulting from a stock split, a reverse stock split, a
subdivision or consolidation of shares or other similar capital adjustment, the
payment of a stock dividend or any other increase or decrease in such shares
effected without receipt of consideration by the Company. Any such determination
by the Administrator shall be conclusive.
8.2 Reorganization. Upon the dissolution or liquidation of the Company
or upon any reorganization, merger, consolidation pursuant to which the Company
does not survive (except for reincorporation of the Company in another state) or
sale of all or substantially all of the assets of the Company or upon a change
in composition of the Board (not approved by a majority of the Board in office
at the time of such change) that results in a change of "control" of the Company
(for purposes of this Section 8.2, "control" is defined in Rule 405 of the
Securities and Exchange Act of 1933, as amended), the Plan shall terminate. The
grant of Stock pursuant to the Plan shall not affect in any way the abilities of
the Company to change or adjust its capital structure or to merge, consolidate,
dissolve, liquidate or to sell or transfer all or any part of its business or
assets.
Article 9
<PAGE> 5
GENERAL PROVISIONS
9.1 General Restrictions.
(a) Issuance of Stock and Compliance with Securities Act. The
Company may postpone the issuance and delivery of Stock to Eligible Persons
until (i) the admission of such shares of Stock to listing on any stock exchange
on which Stock of the Company of the same class is then listed, and (ii) the
completion of such registration or other qualification of such Stock under any
state or federal law, rule or regulation as the Company shall determine to be
necessary or advisable. Any Eligible Person shall make such representations and
furnish such information as may, in the opinion of counsel for the Company, be
appropriate to permit the Company to issue Stock in compliance with the
provisions of the Securities Act of 1933, as amended, and any applicable state
law. All Stock issued and delivered pursuant to the Plan may be subject to such
restrictions, including without limitation a requirement of obtaining an opinion
of counsel upon any sale, transfer, assignment or other disposition, as the
Administrator may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws.
(b) Legends. All certificates for shares of Stock delivered
under the Plan shall be subject to such stop transfer orders and other
restrictions as the Administrator may deem advisable under the rules,
regulations and other requirements of the Securities and Exchange Commission,
any stock exchange upon which the Stock is then listed and any applicable
federal or state securities laws, and the Administrator may cause a legend or
legends to be put on any such certificates to make appropriate reference to such
restrictions.
9.2 Other Compensation Arrangements. Nothing contained in this Plan
shall prevent the Board from adopting other or additional compensation
arrangements, subject to shareholder approval if such approval is required; and
such arrangements may be either generally applicable or applicable only in
specific cases.
9.3 Indemnification. In additional to such other rights of
indemnification as they may have, and to the extent allowed by applicable law,
the Administrator shall be indemnified by the Company against the reasonable
expenses, including attorney's fees, actually incurred in connection with any
action, suit or proceeding or in connection with any appeal therein, to which
they or any one of them may be party by reason of any action taken or failure to
act under or in connection with the Plan, and against all amounts paid by them
in settlement thereof (provided that the settlement has been approved by the
Company, which approval shall not be unreasonable withheld) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such Administrator did not act in good faith and in a manner
which such person reasonably believed to be in the best interests of the
Company, and in the case of a criminal proceeding, had no reason to believe that
the conduct complained of was unlawful; provided, however, that within 60 days
after institution of any such action, suit or proceeding, such Administrator
shall, in writing, offer the Company the opportunity at its own expense to
handle and defend such action, suit or proceeding.
<PAGE> 6
Article 10
EFFECTIVE DATE OF PLAN
10.1 The Plan shall become effective on the date on which the Plan is
adopted by the Board and approved by the shareholders.
Article 11
TERM OF PLAN
11.1 No Stock shall be granted pursuant to the Plan on or after December
31, 2014.
<PAGE> 1
EXHIBIT 10.69
Lease Agreement dated as of September 24, 1999 by and between West Hollywood
Property Limited Partnership and 2400 Willow Lane Associates Limited
Partnership (as Landlord) and The Spectrum Club Company, Inc. (as Tenant)
<PAGE> 2
LEASE AGREEMENT
AS OF SEPTEMBER 24, 1999
LANDLORD:
WEST HOLLYWOOD PROPERTY LIMITED PARTNERSHIP
AND
2400 WILLOW LANE ASSOCIATES LIMITED PARTNERSHIP
TENANT:
THE SPECTRUM CLUB COMPANY, INC.
PREMISES LOCATION:
2400 WILLOW LANE, THOUSAND OAKS, CALIFORNIA
---------------------------
<PAGE> 3
LAND AND BUILDING LEASE AGREEMENT
This Land and Building Lease Agreement (this "Lease") is dated as of
September 24, 1999 (the "Effective Date" or "Commencement Date"), between The
Spectrum Club Company, Inc., a California corporation ("Tenant"), and West
Hollywood Property Limited Partnership and 2400 Willow Lane Associates Limited
Partnership (collectively, "Landlord"), with reference to the recitals set forth
below.
RECITALS
A. Landlord is the owner of that certain real property (the "Premises"),
which legal description is attached hereto and incorporated herein as Exhibit
"A", and is commonly known as:
2400 Willow Lane
Thousand Oaks, California 91361
B. Landlord desires to lease the Premises to Tenant, and Tenant desires
to lease the Premises from Landlord, pursuant to the provisions of this Lease.
1 DEFINITIONS. The following terms, when used in this Lease, shall have the
meaning set forth in this Section.
1.1 LEASE YEAR. The term "Lease Year" shall mean the first twelve (12) full
calendar months after the Effective Date and each subsequent twelve (12) month
period thereafter during the term and any extensions.
1.2 HAZARDOUS MATERIAL. The term "Hazardous Material" means any substance,
material, or waste which is toxic, ignitable, reactive, or corrosive and which
is or becomes regulated by any local or state governmental authority or the
United States Government. The term "Hazardous Material" includes, without
limitation, any material or substance which is (i) defined as a "hazardous
waste," "extremely hazardous waste," "restricted hazardous waste," "hazardous
substance," or "hazardous material," by any local or state law, (ii) oil and
petroleum products and their byproducts, (iii) asbestos, or asbestos-containing
materials, (iv) designated as a "hazardous substance" pursuant to the Federal
Water Pollution Control Act, (v) defined as a "hazardous waste" pursuant to the
Federal Resource Conservation and Recovery Act, or (vi) defined as a "hazardous
substance" pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act.
1.3 ENVIRONMENTAL LAW. The term "Environmental Law" shall mean, any law,
statute, regulation, order, or rule now or hereafter promulgated by any
governmental entity, whether local, state, or federal, relating to air
pollution, water pollution, noise control, and/or transporting, storing,
handling, discharge of or disposal of Hazardous Material, including, without
limitation, the following: the Clean Air Act; the Resource Conservation and
Recovery Act, as amended by the Hazardous Waste and Solid Waste Amendments of
1984; the Comprehensive Environmental Response, Compensation and Liability Act,
as amended by the Superfund Amendments and Reauthorization Act of 1986; the
Toxic Substances Control Act; the Federal Insecticide, Fungicide and Rodenticide
Act, as amended; the Safe Drinking Water Act; OSHA; the Hazardous Liquid
Pipeline Safety Act; the Hazardous Materials Transportation Act; and the
National Environmental Policy Act, as the same may be amended from time to time.
<PAGE> 4
2. PREMISES.
2.1 PREMISES. Landlord leases to Tenant, and Tenant leases from Landlord, the
Premises on the terms and conditions set forth in this Lease. The Premises
consist of the real property described in Exhibit "A" together with all
improvements and fixtures on or attached to said real property, except for those
improvements and/or fixtures set forth on Schedule 2.1. More particularly, the
Premises consist of a building (the "Building"), a portion of which consists of
a health and fitness club on the ground floor (the "Club") the construction of
which has not yet been completed and another portion of which consists of a
ground floor office lobby and second floor office space (the "Office Space") for
which the tenant improvements have not yet been built out. The Premises further
include associated parking and common areas.
2.2 CONDITION OF PREMISES. Tenant represents, warrants and covenants to Landlord
that Tenant has conducted Tenant's own investigation of the Premises, the
physical condition thereof and all other matters relating thereto, including
accessibility and location of utilities, improvements, existence of hazardous
materials, taxes, operating expense data, insurance costs, zoning, covenants,
conditions and restrictions and all other matters which in Tenant's judgment
might bear upon the value and suitability of the Premises for Tenant's purposes
or Tenant's willingness to enter into this Lease. Tenant recognizes that
Landlord would not lease the Premises except on an "AS IS" basis and
acknowledges that Landlord has made no representations or warranties, express or
implied, of any kind in connection with this Lease. Landlord shall deliver the
Premises to Tenant in the same condition as the Premises now are, reasonable
wear and tear excepted. Tenant further recognizes and agrees that Landlord shall
not be required to perform any work of construction, improvement or alteration
of or to the Premises in connection with Tenant's initial occupancy of the
Premises.
3. TERM.
3.1 INITIAL TERM. The term of this Lease ("Lease Term") shall be for a period of
eighteen (18) years ("Primary Term") commencing upon the Effective Date plus the
remainder of any partial calendar month in which the Primary Term commences; it
being agreed that any such partial calendar month shall be deemed included at
the very beginning of the first Lease Year of the Primary Term. Concurrently
with the Effective Date, the Memorandum of Lease, a copy of which is attached
hereto and incorporated herein as Exhibit "B," shall be recorded; provided,
however, that, at the expiration or earlier termination of this Lease, Tenant
shall execute a disclaimer or quitclaim in a form acceptable to Landlord
evidencing such expiration or earlier termination and that Tenant no longer has
any right, title or interest in or to the Premises. The expiration date of the
term shall be the last day of the Primary Term, unless extended as set forth in
Section 3.2. References to the "term of the Lease" shall include extensions, if
any. Except as otherwise expressly stated, the terms and conditions of this
Lease shall remain in effect during any extension, renewal, or holdover of the
Primary Term.
3.2 OPTIONS TO EXTEND. Landlord hereby grants to Tenant two (2) consecutive
options (collectively, the "Extension Options" and, individually, an "Extension
Option") to extend the Lease Term each for a period of five (5) years
(collectively, the "Extension Terms" and individually an "Extension Term"), the
first Extension Term commencing upon the expiration of the Primary Term, and the
second Extension Term commencing upon the expiration of the first Extension
Term, upon each and all of the following terms and conditions:
3.2 (1) Tenant must give to Landlord, and Landlord must have received,
written notice of the exercise of each of the first and second Extension Options
no earlier than three hundred sixty (360) days and no later than two hundred
seventy (270) days prior to the end of the Primary Term and the first Extension
Term, respectively, time being of the essence. If timely notification of the
exercise of an Extension Option is not so given and received, then such
Extension Option and any succeeding Extension Option shall automatically expire
and there shall be no further right to extend the Lease Term.
<PAGE> 5
3.2 (2) All of the terms and conditions of this Lease, except for the
Extension Options, shall apply during the Extension Terms.
3.2 (3) The provisions of Section 3.3 are conditions of the Extension
Options.
3.3 CONDITIONS TO EXTENSION OPTIONS.
3.3.1 The Extension Options are not assignable separate and
apart from this Lease, and they may not be separated from this Lease in any
manner, either by reservation or otherwise.
3.3.2 Tenant shall have no right to exercise any of the
Extension Options (i) during the time commencing from the date Landlord gives to
Tenant a notice of default and continuing until the non-compliance alleged in
said notice of default is cured (but only if such default is susceptible to
being cured and such cure is accomplished prior to the expiration of the
applicable cure period, if any), or (ii) during the period of time commencing on
the day after a monetary obligation to Landlord is due from Tenant and remains
unpaid under the Lease (without any necessity for notice thereof to Tenant) and
continuing until the obligation is paid, or (iii) if Tenant has committed any
non-curable breach of this Lease or is otherwise in default of this Lease, or
(iv) if this Lease has been terminated.
3.3.3 The period of time within which the Extension Options may
be exercised shall not be extended or enlarged by reason of Tenant's inability
to exercise such right because of the provisions of the foregoing Section 3.3.2,
provided, however, that if Landlord gives to Tenant a notice of default and it
is determined by a court of competent jurisdiction that Tenant was not actually
in default under this Lease, Tenant shall be given an additional thirty (30)
days from the date of such judicial determination in which to exercise the
applicable Extension Option.
3.3.4 At Landlord's sole election, an Extension Option shall
terminate and be of no further force or effect, notwithstanding Tenant's due and
timely exercise thereof, if, after such exercise but prior to the commencement
of the applicable Extension Term (i) Tenant is in default of any of the terms,
covenants or conditions of this Lease beyond the applicable cure period, if any,
to cure such default, or (ii) this Lease has been terminated.
As used in Sections 3.2 and 3.3, "default of this Lease" shall mean an Event of
Default (as defined in Section 17.1) and any act or omission which, with the
passage of time and/or the giving of notice by Landlord, would constitute an
Event of Default under this Lease.
4. BASE MONTHLY RENT.
4.1 NET-NET-NET LEASE. This is a net-net-net lease. All costs and expenses
arising out of the ownership, use, occupancy, maintenance and repair of the
Premises, including, but not limited to, taxes and insurance, as set forth
below, are to be paid by Tenant and without regard to whether such costs and
expenses arose, occurred or related, in whole or in part, to any period of time
before or after the Commencement Date; it being agreed that Landlord is to bear
no such costs or expenses whatsoever.
4.2 BASE MONTHLY RENT. For the first five (5) Lease Years, Tenant shall pay to
Landlord as base monthly rent (the "Base Monthly Rent") the sum of One Hundred
Sixteen Thousand Six Hundred Sixty Seven Dollars ($116,667.00). Base Monthly
Rent shall be payable by Tenant to Landlord in advance in equal monthly
installments on the first (1st) day of each calendar month during the Primary
Term and each Extension Term for which an option has been exercised, without
prior notice, invoice, demand, deduction, or offset whatsoever. The payment of
Base Monthly Rent shall commence on the Effective Date; provided, however, if
the Effective Date is on a day other than the first day of a calendar month, the
Base Monthly Rent payable by Tenant to Landlord shall be prorated for the first
fractional month of the
<PAGE> 6
Lease Term and paid on the Effective Date. Landlord shall have the right to
accept all rent and other payments, whether full or partial, and to negotiate
checks and payments thereof without any waiver of rights, irrespective of any
conditions to the contrary sought to be imposed by Tenant. All sums due
Landlord, from time to time, under this Lease shall be deemed to constitute
rent.
4.2.1 HOLDBACK. Landlord has deposited or caused to be deposited, or
will deposit or cause to be deposited, the sum of Two Million Dollars
($2,000,000) (the "Holdback") (a) with the lender who has made the acquisition
loan to Landlord that is secured by the Premises or (b) in an escrow established
with such lender's consent and approval. The Holdback shall be disbursed to
Tenant, subject to the requirements of such lender, upon completion of the work
that is required to be performed by Tenant pursuant to Paragraph 12.3 hereof.
Tenant shall be entitled to receive monthly, so long as Tenant is not in default
under the Lease, interest in an amount equal to that earned by Landlord on the
Holdback. Landlord and Tenant contemplate that monthly interest will be payable
on the Holdback.
4.3 MONTHLY RENTAL INCREASE. The Base Monthly Rent shall increase
commencing on the first day of the sixth, eleventh and sixteenth Lease Year, and
if Tenant exercises its options to extend the term of this Lease, on the first
day of the twenty-first and twenty-sixth Lease Years (each such day, an
"Adjustment Date"), as follows:
4.3.1 On the first Adjustment Date, the Base Monthly Rent shall be
increased to be the lesser of (a) $128,811 or (b) the amount obtained by
multiplying the Base Monthly Rent payable during the prior Lease Year by a
fraction whose numerator is twice the Adjustment Month Index and whose
denominator is the Base Month Index;
4.3.2 On the second Adjustment Date, the Base Monthly Rent shall be
increased to be the lesser of (a) $135,629 or (b) the amount obtained by
multiplying the Base Monthly Rent payable during the prior Lease Year by a
fraction whose numerator is twice the Adjustment Month Index and whose
denominator is the Base Month Index;
4.3.3 On the third Adjustment Date, the Base Monthly Rent shall be
increased to be the lesser of (a) $150,602 or (b) the amount obtained by
multiplying the Base Monthly Rent payable during the prior Lease Year by a
fraction whose numerator is twice the Adjustment Month Index and whose
denominator is the Base Month Index;
4.3.4 If Tenant exercises the First Extension Option, on the fourth
Adjustment Date, the Base Monthly Rent shall be increased to $167,229; and
4.3.5 If Tenant exercises the Second Extension Option , on the fifth
Adjustment Date, the Base Monthly Rent shall be increased to $185,691;
provided, however, that if the Base Monthly Rent shall be increased, on any
Adjustment Date, pursuant to clause (b) of the applicable subsection of this
Section 4.3 rather than by clause (a) thereof, then in such case the Base
Monthly Rent shall be further increased, but not decreased, on each anniversary
of such Adjustment Date until, but not including, the next occurring Adjustment
Date by multiplying the Monthly Base Rent in effect immediately prior to such
anniversary date by a fraction whose numerator is the Index for that month which
is three (3) months prior to such anniversary date and whose denominator is the
Index for that month which is three (3) months prior to such Adjustment Date.
<PAGE> 7
4.4 DEFINITIONS. As used in Section 4.3:
4.4.1 "Adjustment Month Index" means the Index for that month which is
three (3) months prior to the Adjustment Date.
4.4.2 "Index" means CONSUMER PRICE INDEX ALL URBAN CONSUMERS (CPI-U;
U.S. City average; All Items; 1982-84 = 100) published by the United States
Department of Labor, Bureau of Labor Statistics. If the base of the Index
changes from the 1982-84 base (100), the Index shall, thereafter, be adjusted to
the 1982-84 base 100 before the computation indicated above is made. If the
Index cannot be converted to the 1982-84 base or if the Index is otherwise
revised, the adjustment under this section shall be made with the use of such
conversion factor, formula or table for converting the Index as may be published
by the Bureau of Labor Statistics. If the Index is at any time hereafter no
longer published, a comparable index generally accepted and employed by the real
estate profession, as reasonably determined by Landlord, shall be used.
4.4.3 "Base Month Index" means the Index for that month which is five
(5) years and three (3) months prior to the Adjustment Date.
4.4.4 If the Adjustment Month Index is unavailable on the Adjustment
Date, Landlord may calculate the adjustment under this Section based on the
Index for a month preceding the Adjustment Date. When the Adjustment Month Index
becomes available, Landlord shall provide Tenant with the corrected computations
for adjustments under Section 4.3.1, and Tenant shall pay Landlord any
deficiency for any intervening months within ten (10) days of receipt of the
corrected computations. If the corrected computations show instead that Tenant
has overpaid Landlord, then Tenant shall be entitled to offset the amount of
such overpayment, less any sums due Landlord by Tenant, against Base Monthly
Rent, as the same shall come due.
5. ADDITIONAL RENT. THIS SECTION WAS INTENTIONALLY LEFT BLANK.
6. SUBSTITUTE RENT AND INCREASES. THIS SECTION WAS INTENTIONALLY LEFT BLANK.
7. SECURITY DEPOSIT. Tenant shall deposit with Landlord upon execution hereof
One Hundred Ten Thousand Dollars ($110,000), as security for Tenant's faithful
performance of Tenant's obligations hereunder. If Tenant fails to pay rent or
other charges due hereunder, or otherwise defaults with respect to any provision
of this Lease, then Landlord may use, apply or retain all or any portion of said
security deposit for the payment of any rent or other charge in default or for
the payment of any other sum to which Landlord may become obligated, or be
permitted hereunder to pay, by reason of Tenant's default, or to compensate
Landlord for any loss or damage which Landlord may suffer thereby. If Landlord
so uses or applies all or any portion of said deposit, then Tenant shall, within
ten (10) days after written demand therefor, deposit cash with Landlord in an
amount sufficient to restore said deposit to the full amount hereinabove stated,
and Tenant's failure to do so shall be a material breach of this Lease. Tenant
shall deposit with Landlord, from time to time, additional security deposit so
that the amount of security deposit held by Landlord shall at all times bear the
same proportion to the current Monthly Base Rent as the original security
deposit bears to the original Monthly Base Rent set forth in Paragraph 4.2.
Landlord shall not be required to keep said deposit separate from its general
accounts. If Tenant performs all of Tenant's obligations hereunder, then said
deposit, or so much thereof as has not theretofore been applied by Landlord
shall be returned to Tenant (or, at Landlord's option, to the last assignee, if
any, of Tenant's interest hereunder), without payment of interest or other
increment for its use, at the expiration of the term
<PAGE> 8
hereof, but after Tenant has vacated the Premises. No trust relationship is
created herein between Landlord and Tenant with respect to said security
deposit. Notwithstanding the foregoing, Landlord hereby waives Tenant's
obligation to provide such security deposit unless and until the occurrence of
an event pursuant to Section 16.1 which gives rise to the determination of a
Fair Market Rental Rate (as defined in said Section).
8. USE OF THE PREMISES. Tenant shall use (i) the Club portion of the Premises
only for a first class health and fitness club and other ancillary uses typical
to a Spectrum Club, (ii) the Office Space portion of the Premises, once the Deck
is completed, only for general office use and (iii) the parking and common areas
of the Premises only for parking and other common area uses and, in each such
instance, for no other uses without the prior written consent of Landlord, which
Landlord may withhold in its sole discretion. In no event shall all or any part
of the Premises be used for any of the uses set forth on Exhibit "C" attached
hereto and incorporated herein by this reference (collectively, "Prohibited
Uses"). Once Tenant has completed the applicable construction obligation
pursuant to Section 12.3, Tenant shall continuously operate the Club portion of
the Premises as a health and fitness club and the Office Space portion of the
Premises for general office use by office subtenants. Tenant has satisfied
itself, and represents to Landlord, that use of the Premises for a health and
fitness club and general office use, once the Deck is completed, is lawful and
conforms to all applicable zoning and other use restrictions and regulations
applicable to the Premises. Tenant shall, at Tenant's expense, comply promptly
with all applicable statutes, ordinances, rules, regulations, orders, covenants
and restrictions of record, and requirements in effect during the term or any
part of the term hereof, regulating the use by Tenant of the Premises,
including, without limitation, the obligation at Tenant's cost, to alter,
maintain, or restore the Premises in compliance and conformity with all laws
relating to the condition, use, or occupancy of the Premises during the term of
this Lease (including any and all requirements as set forth in the Americans
with Disabilities Act). Tenant shall not perform any acts or carry on any
practices which may injure the Premises.
9. PROPERTY TAXES, ASSESSMENTS AND UTILITIES.
9.1 TENANT'S REQUIRED PAYMENTS.
9.1.1 Except in the event that a lender of Landlord shall require, from
time to time, the establishment of an impound account for the payment of taxes
or that such taxes be paid earlier than set forth below, in which case Tenant
shall, as applicable, make such deposits into such account or pay such taxes on
or before such earlier date, in each such instance, as may be required by such
lender, Tenant shall pay 30 days before delinquency, and promptly provide to
Landlord and to any such lender of which Tenant has notice written proof of
payment for, all taxes, assessments, license fees, costs incurred pursuant to
covenants and restrictions affecting the Premises, and other charges ("taxes")
levied or assessed against all merchandise, personal property, real property,
buildings and improvements, and any other obligations which are or may become a
lien or levied against the Premises. If any such taxes paid by Tenant shall
cover any period of time after the expiration of the term hereof, then Tenant's
share of such taxes shall be equitably prorated to cover only the period of time
within the tax fiscal year during which this Lease shall be in effect, and
Landlord shall reimburse Tenant to the extent required; it being agreed that
there shall be no such proration, and Tenant shall be solely responsible for,
the entire amount of any such taxes that cover, whether in whole or in part, any
period of time prior to the term hereof. If Tenant shall fail to pay any such
taxes, then Landlord shall have the right to (i) pay the same, in which case
Tenant shall repay such amount to Landlord with Tenant's next rent installment
together with interest at the lesser of eighteen percent (18%) per annum and the
maximum rate then allowable by law and (ii) thereafter require Tenant to impound
with Landlord, or for the benefit of Landlord with any lender of Landlord, such
taxes pursuant to Section 17.7.
<PAGE> 9
9.1.2 If at any time during the term, the state in which the Premises
are located or any political subdivision of the state, including any county,
city, county and city, public corporation, district, or any other political
entity or public corporation of that state, levies or assesses against Landlord
a tax, fee, or excise on (i) rents, including, if applicable, property taxes,
insurance, maintenance, and other costs incurred by Tenant by which Landlord may
benefit; (ii) on the square footage of the Premises; (iii) on the act of
entering into this Lease; or (iv) on the occupancy of Tenant, or levies or
assesses against Landlord any other tax, fee, or excise, however described,
including, without limitations, a so-called value added tax, as a direct
substitution in whole or in part for, or in addition to, any real property
taxes, then Tenant shall reimburse to Landlord or directly pay before
delinquency that tax, fee, or excise. It is the intention of Tenant and Landlord
that all new and increased assessments, taxes, fees, levies, and charges, and
all similar assessments, taxes, fees, levies, and charges be included within the
definition of taxes for the purpose of this Lease. If at any time during the
term of this Lease the laws concerning the methods of real property taxation
prevailing at the commencement of the term of this Lease are changed so that a
tax or excise on rents or any other tax, however described, is levied or
assessed against Landlord as a substitution in whole or in part for any real
property taxes, then taxes shall include, but not be limited to, any such
assessment, tax, fee, levy, or charge allocable to or measured by the area of
the Premises or the rent payable hereunder, including, without limitation, any
gross income tax with respect to the receipt of such rent, or upon or with
respect to the possession, leasing, operating, management, maintenance,
alteration, repair, use, or occupancy by Tenant of the Premises, or any portion
thereof. Accordingly, the term "taxes" shall also include any tax, fee, levy,
assessment or charge (i) in substitution of, partially or totally, any tax, fee,
levy, assessment or charge hereinabove included within the definition of
"taxes," or (ii) the nature of which was hereinbefore included within the
definition of "taxes," or (iii) which is imposed for a service or right not
charged prior to July 1, 1978, or, if previously charged, has been increased
since July 1, 1978, or (iv) which is imposed as a result of a transfer, either
partial or total, of Landlord's interest in the Premises or which is added to a
tax or charge hereinbefore included within the definition of "taxes" by reason
of such transfer, or (v) which is imposed by reason of this transaction, any
modifications or changes hereto, or any transfers hereof.
9.2 PAYMENTS NOT REQUIRED BY TENANT. Subject to Section 9.1.2, Tenant shall not
be required to pay any municipal, county, state, or federal income or franchise
taxes of Landlord, or any municipal, county, state, or federal estate,
succession, inheritance, or transfer taxes of Landlord.
9.3 ASSESSMENTS. If any assessment for a capital improvement made by public or
governmental authority shall be levied or assessed against the Premises, and the
assessment is payable either in a lump sum or on an installment basis, then
Tenant shall have the right to elect the basis of payment. If Tenant shall elect
to pay the assessment on the installment basis, then Tenant shall pay only those
installments which shall become due and payable during the term of this Lease.
9.4 UTILITY PAYMENTS. Tenant shall promptly pay when due all charges for water,
gas, electricity, and all other utilities furnished to or used upon the
Premises, including all charges for installation, termination, and relocations
of such service.
9.5 PERSONAL PROPERTY TAXES. Tenant shall pay prior to delinquency all taxes
assessed against and levied upon trade fixtures, furnishings, equipment and all
other personal property of Tenant contained in the Premises or elsewhere. When
possible, Tenant shall cause said trade fixtures, furnishings, equipment and all
other personal property to be assessed and billed separately from the real
property of Landlord. If any of Tenant's said personal property shall be
assessed with Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within ten (10) days after receipt of a written statement
setting forth the taxes applicable to Tenant's property.
9.6 TENANT'S RIGHT TO CONTEST UTILITY CHARGES, CONTEST TAXES AND SEEK REDUCTION
OF ASSESSED VALUATION OF THE PREMISES. Tenant, at its cost, shall have the
right, at any time, to seek a reduction in the assessed valuation of the
Premises or to contest any taxes or utility charges that are to be paid by
Tenant. Subject to the requirements of any lender of Landlord, if Tenant seeks a
reduction or contests any taxes or
<PAGE> 10
utility charges, the failure on Tenant's part to pay the taxes or utility
charges shall not constitute a default as long as Tenant complies with the
provisions of this Section. Tenant may use any means allowed by statute to
protest property tax assessments or utility charges as defined in this Section 9
as long as Tenant remains current as to all other terms and conditions of this
Lease. If, during the protest period, any lease defaults occur and the protested
taxes or assessments have not been paid, then Tenant shall furnish to Landlord a
surety bond issued by an insurance company qualified to do business in the state
where the Premises are located. The amount of bond shall equal one hundred fifty
percent (150%) of the total amount of taxes in dispute. The bond shall hold
Landlord and the Premises harmless from any damage arising out of the proceeding
or contest and shall insure the payment of any judgment that may be rendered.
9.7 LANDLORD NOT REQUIRED TO JOIN IN PROCEEDINGS OR CONTEST BROUGHT BY TENANT.
Landlord shall not be required to join in any proceeding or contest brought by
Tenant unless the provisions of the law require that the proceeding or contest
be brought by or in the name of Landlord or the owner of the Premises. In that
case, Landlord shall join in the proceeding or contest or permit it to be
brought in Landlord's name as long as Landlord is not required to bear any cost.
Tenant, on final determination of the proceeding or contest, shall immediately
pay or discharge any decision or judgment rendered, together with all costs,
charges, interest, and penalties incidental to the decision or judgment.
10. FURNITURE, FIXTURES AND EQUIPMENT.
10.1 FURNITURE, FIXTURES, AND EQUIPMENT. During the term, Tenant shall, at
Tenant's expense and from time to time, place, install, repair and maintain such
furniture, fixtures, and equipment on the Premises as may be needed and shall be
sufficient for the conduct of Tenant's business and are consistent with Tenant's
permitted use.
10.2 LANDLORD'S WAIVER. Tenant may finance equipment, trade fixtures, signs, and
furniture which may be installed in or about the Premises. Landlord shall,
within twenty (20) business days of receiving a written request, execute and
deliver to any institutional lender a Waiver and Consent Agreement approved by
Landlord and substantially in the form of Exhibit "D," attached hereto and
incorporated herein. During the term of the Lease and subject to the terms and
conditions of any applicable equipment leases or financing arrangements and
Sections 10.1 and 10.3, any furniture, fixtures, and equipment placed in the
Premises by Tenant may be replaced or removed by Tenant periodically during the
term.
10.3 REMOVAL OF FURNITURE, FIXTURES, AND EQUIPMENT AT EXPIRATION OF LEASE. At
the expiration of this Lease (whether at the end of the initial term, if no
Extension Option has been exercised, or at the end of any then applicable
Extension Term, if any Extension Option has been exercised), Tenant shall remove
all Tenant's furniture and equipment from the Premises; provided, however, that
Landlord shall have the option, but not the obligation, to elect, by written
notice to Tenant prior to such expiration, to have any or all of such furniture
and equipment, as Landlord may specify in any such notice, become the property
of Landlord upon such expiration and remain upon and be surrendered with the
Premises, without disturbance, molestation or injury. In any such event,
Landlord shall pay to Tenant an amount equal to the lesser of the actual cash
value or the unamortized value of such furniture or equipment, as then carried
on Tenant's books for federal income tax purposes. Notwithstanding the foregoing
and subject to any election by Landlord pursuant to Section 12.1, all building
fixtures and equipment (including, without limitation, air conditioning units,
heating equipment, plumbing fixtures, hot water heaters, wall covering,
carpeting or other floor covering cemented or otherwise affixed to the floor,
cabinetry and draperies) that may be installed in or attached to the Premises by
Tenant shall, on the expiration date or earlier termination of this Lease for
any reason, be the property of Landlord and remain upon and be surrendered with
the Premises, without disturbance, molestation or injury. Tenant shall make such
repairs and restoration of the Premises as are necessary to correct any damage
to the Premises from the removal of any furniture, fixtures, equipment or
alterations by Tenant and shall, subject to any election by Landlord pursuant to
Section 12.1, return the Premises to Landlord in the same condition existing (i)
as to the Club
<PAGE> 11
portion of the Premises, when the Club was completed and opened for business,
(ii) as to the Office Space portion of the Premises, when the Office Space was
fully built out with initial tenant improvements and (iii) as to the associated
parking and common areas of the Premises, when the Deck was completed, in each
instance, normal wear and tear excepted.
10.4 RIGHT TO AFFIX SIGNS. Tenant shall have the right to affix signs
customarily used in its business upon the windows, doors, interior, and exterior
walls of the Premises, and such free-standing signs as may seem appropriate to
Tenant and are authorized by any governmental authority having jurisdiction over
the Premises. Tenant shall remove all such signs on the expiration date or
earlier termination of this Lease for any reason, unless Landlord shall elect,
in its sole discretion and by written notice to Tenant, to have any or all of
such signs be surrendered with the Premises, in which case any such signs shall
become the property of Landlord and remain upon and be surrendered with the
Premises, without disturbance, molestation or injury.
11. MAINTENANCE OF THE PREMISES.
11.1 TENANT'S OBLIGATION TO MAINTAIN THE PREMISES. During the term of this
Lease, Tenant shall, at its own expense, keep and maintain the entire Premises
in good order and repair, including, but not limited to, the interior, exterior,
floors, walls, roof, foundation, structural elements, plumbing, pipes,
electrical wiring, switches and conduits and all mechanical equipment relating
to the Premises; and the sidewalks, curbs, walls, trash enclosures, landscaping
with sprinkler system (if installed), light standards, and parking areas which
are a part of the Premises. Tenant shall make such repairs and replacements as
may be necessary, regardless of whether the benefit of such repair or
replacement extends beyond the term of this Lease. The Premises shall be
returned to Landlord at the termination or expiration of this Lease in good
condition, ordinary wear excepted. For as long as Tenant is not in default of
any of the terms and conditions of this Lease, Landlord hereby assigns to Tenant
the right to enforce all building contractor, subcontractor, and manufacturer's
warranties and guarantees applicable to the Premises; and Landlord shall
cooperate with Tenant at Tenant's request in any action to enforce such
warranties and guarantees. In the event of destruction of the Premises by fire
or casualty, the condition of the Premises upon termination of this Lease shall
be governed by Section 14.
11.2 OBLIGATION TO KEEP THE PREMISES CLEAR. Tenant shall keep the Premises,
including sidewalks adjacent to the Premises and loading areas allocated for the
use of Tenant, clean and free from rubbish and debris at all times. Tenant shall
store all trash and garbage within the Premises and arrange for regular pickup
and cartage of such trash and garbage at Tenant's expense.
11.3 LANDLORD TO HAVE NO OBLIGATION TO MAINTAIN THE PREMISES. Landlord shall
have no obligation whatsoever to construct, improve, repair, maintain or rebuild
the Premises (collectively, "Construction Obligations"). Tenant further
acknowledges and agrees that any loan that may, from time to time, be secured,
in whole or in part, by the Premises, or any part thereof, may impose certain
Construction Obligations upon Landlord, including, without limitation, those
relating to items of deferred maintenance, deferred repair or capital
improvements that may be identified, from time to time, by any such lender
(collectively, "Lender Construction Obligations"). Without limiting the
generality of the foregoing, Tenant shall be solely responsible, as between
Landlord and Tenant, for complying, diligently, promptly and at Tenant's sole
cost and expense, with any Lender Construction Obligations of which Tenant has
notice, in each instance, on or before the date for compliance, and otherwise in
full satisfaction of the other terms and conditions for such compliance, set
forth in the applicable loan documents, including, without limitation, providing
Landlord with such evidence as may be required by Landlord, from time to time,
to satisfy Lender that such Lender Construction Obligations have been satisfied
(including, without limitation, lien releases, architectural certifications,
itemization of costs spent, paid receipts and whatever other documents Landlord
may be required to provide to such lender during and upon the completion of such
Lender Construction Obligations).
<PAGE> 12
12. REPAIRS AND ALTERATIONS.
12.1 RIGHT TO MAKE ALTERATIONS. At all times during the term of this Lease,
Tenant shall have the right to make alterations, additions, and improvements to
the interior or exterior of the Premises and parking areas adjacent to the
Premises. Nevertheless, any one alteration or addition, or related series of
alterations or additions, that is over Fifty Thousand Dollars ($50,000) or is
structural in nature or affects building systems shall not be made by Tenant
without prior written consent of Landlord, which such consent shall not be
unreasonably withheld, conditioned or delayed. Any alterations, additions, and
improvements which may be made or installed by Tenant shall be removed from the
Premises at the termination or expiration of this Lease if Landlord's consent
thereto was required and Landlord conditioned such consent on such removal. In
addition, if Landlord, in Landlord's sole discretion, shall elect to require
Tenant, by written notice to Tenant, to restore some or all of the Premises to
the condition existing when Tenant or an affiliate first acquired title to the
Premises, then Tenant shall, diligently and in a good and workmanlike manner,
commence and complete such restoration, lien free and otherwise in accordance
with the terms and conditions of this Lease, on or before the termination or
expiration of this Lease if commercially reasonable to do. If it is not
commercially reasonable for Tenant to complete such restoration by such
expiration or termination, then Tenant shall do so as soon as reasonably
possible thereafter. Landlord shall give any such notice requiring such
restoration, if at all, by no later than the date occurring 30 days after the
date of such expiration or termination. Otherwise, any such alterations,
additions, and improvements shall remain upon the Premises and be surrendered
with the Premises to Landlord. Any alteration, addition, or improvement shall be
accomplished by Tenant in a good workmanlike manner, in conformity with
applicable laws and regulations and by a contractor approved by Landlord. Upon
completion of any work, Tenant shall provide to Landlord "as-built" plans,
copies of all construction contracts, building permits, inspection reports and
all other required governmental approvals, and proof of payment of all labor and
materials. Tenant shall pay when due all claims for such labor and materials and
shall give Landlord at least twenty (20) days prior written notice of the
commencement of any such work. Landlord may enter upon the Premises, in such
case, for the purpose of posting appropriate notices, including, but not limited
to, notices of nonresponsibility.
12.2 TENANT SHALL NOT RENDER PREMISES LIABLE FOR ANY LIEN. Tenant shall have no
right, authority, or power to bind Landlord, or any interest of Landlord in the
Premises, nor to render the Premises liable for any lien or right of lien for
the payment of any claim for labor, material, or for any charge or expense
incurred to maintain, to repair, or to make alterations, additions, and
improvements to the Premises. Tenant shall in no way be considered the agent of
Landlord in the construction, erection, modification, repair, or alteration of
the Premises. Notwithstanding the above, Tenant shall have the right to contest
the legality or validity of any lien or claim filed against the Premises. No
contest shall be carried on or maintained by Tenant after the time limits in the
sale notice of the Premises for any such lien or claim unless Tenant (i) shall
have duly paid the amount involved under protest; (ii) shall have procured and
recorded a lien release bond from a bonding company acceptable to Landlord in an
amount not less than one hundred fifty percent (150%) of the amount involved; or
(iii) shall have procured a stay of all proceedings to enforce collection. Upon
a final adverse determination of any contest, Tenant shall pay and discharge the
amount of the lien or claim determined to be due, together with any penalties,
fines, interest, cost, and expense which may have accrued, and shall provide
proof of payment to Landlord.
12.3 TENANT'S INITIAL CONSTRUCTION OBLIGATIONS. Subject to the other terms and
conditions of this Lease, Tenant shall, as expeditiously as possible consistent
with sound construction practices, complete, at its expense, the construction of
the Club, the Deck and all required initial tenant improvements to the Office
Space; it being agreed, however, that in any and all events, Tenant shall have
completed the construction of the Deck and all required initial tenant
improvements to the Office Space on or before the date occurring 12 months after
the Effective Date. If Tenant shall fail to complete any of such work of
construction by such date, then Landlord may elect, in its sole discretion and
from time to time, but shall not be obligated, to complete any or all of such
work of construction, at Tenant's cost and expense. Any
<PAGE> 13
such sums so expended by Landlord shall constitute rent and be due Landlord by
Tenant within five (5) business days of Landlord's presenting to Tenant
reasonably satisfactory evidence that such sums either are due or have been
paid. If Landlord shall elect, in its sole discretion, to complete any of such
work, then Landlord may, at any time or from time to time thereafter, also
elect, in its sole discretion, to cease any or all of such work of construction
before its completion and with no liability whatsoever to Tenant as a result
thereof. Tenant shall indemnify, defend and hold Landlord harmless from and
against any and all claims, costs, damages, liabilities and losses of any kind
or nature arising out of or in connection with any such election by Landlord,
from time to time, either to complete or to cease all or any portion of such
work of construction.
13. INDEMNITY AND INSURANCE.
13.1 INDEMNIFICATION OF THE PARTIES. The parties to this Lease have the
following indemnification obligations:
13.1.1 INDEMNIFICATION BY TENANT. Subject to Section 13.1.2, Tenant
shall indemnify, defend, protect and hold Landlord and its affiliates harmless
from and against any and all claims, actions, proceedings, losses, costs,
damages, expenses and/or liabilities (including, without limitation, court costs
and reasonable attorneys' fees) incurred in connection with or arising at any
time and from any cause whatsoever, and whether before or after the Commencement
Date, in or about the Premises, including, without limiting the generality of
the foregoing: (i) any default by Tenant in the observance or performance of any
of the terms, covenants, or conditions of this Lease on Tenant's part to be
observed or performed; (ii) the use or occupancy of the Premises by Tenant or
any person claiming by, through, or under Tenant; (iii) the condition of the
Premises or any occurrence or happening on the Premises from any cause
whatsoever, or (iv) any acts, omissions, or negligence of Tenant or any person
claiming by, through, or under Tenant, or of the contractors, agents, servants,
employees, visitors, or licensees of Tenant or any such person, in, on, or about
the Premises, in each such instance either prior to or during the Lease term
(including, without limitation, any holdovers in connection therewith),
including, without limitation, any acts, omissions, or negligence in the making
or performance of any alterations. Tenant further agrees to indemnify, defend,
protect and hold harmless Landlord's agents, and the landlord or landlords under
all ground or underlying leases, from and against any and all claims, actions,
proceedings, losses, costs, damages, expenses and/or liabilities (including,
without limitation, reasonable attorney's fees) incurred in connection with or
arising from any claims by any persons by reason of injury to persons or damage
to property occasioned by any use, occupancy, condition, occurrence, happening,
act, omission, or negligence referred to in the preceding sentence. The
provisions of this Section shall survive the expiration or sooner termination of
this Lease with respect to any act or omission occurring prior to such
expiration or termination, and shall not be limited by reason of any insurance
carried by Landlord and Tenant.
13.1.2 INDEMNIFICATION BY LANDLORD. Landlord shall indemnify, defend,
protect and hold Tenant and its affiliates harmless from and against any and all
claims, actions, proceedings, losses, costs, damages, expenses and/or
liabilities (including, without limitation, court costs and reasonable
attorneys' fees) proximately caused by: (a) any breach or default in the
performance of any obligation required to be performed by Landlord under the
terms of this Lease or (b) any act or omission of Landlord or its agents and
employees amounting to willful misconduct or fraud.
<PAGE> 14
13.2 INSURANCE COMPANY REQUIREMENT. Insurance required by this Lease shall be
issued by companies holding a general policyholder's rating of at least A -VII
as set forth in the most current issue of Best's Insurance Guide and authorized
to do business in the state in which the Premises are located. If this
publication is discontinued, then another insurance rating guide or service
generally recognized as authoritative shall be substituted by Landlord.
13.3 INSURANCE CERTIFICATE REQUIREMENTS. Tenant shall deliver to Landlord
certificates evidencing the existence and amounts of the insurance with loss
payable clauses as required herein and endorsements evidencing required
additional insured coverage. Each such certificate shall state that the
applicable such policy shall not be cancelable or subject to reduction of
coverage or other modification except after thirty (30) days prior written
notice to Landlord.
13.4 MINIMUM ACCEPTABLE INSURANCE COVERAGE REQUIREMENTS.
13.4.1 Tenant shall, at Tenant's expense, obtain and keep in full force
during the term of this Lease a policy of combined single limit personal injury
and property damage insurance insuring Tenant against any liability arising out
of the ownership, use, occupancy, or maintenance of the Premises and all of its
appurtenant areas. The insurance shall, at all times, be in an unimpaired amount
not less than Five Million Dollars ($5,000,000) per occurrence. The policy shall
provide blanket contractual liability coverage. However, the limits of the
insurance shall not limit the liability of Tenant. In addition, Tenant shall, at
Tenant's expense, obtain and keep in full force during the term of this Lease an
umbrella liability policy in an amount not less than Five Million Dollars
($5,000,000).
13.4.2 Tenant shall, at Tenant's expense, obtain and keep in force
during the term of this Lease a policy or policies of insurance covering loss or
damage to the Premises. The insurance shall be in an amount not less than the
replacement value of the improvements (less slab, foundation, supports, and
other customarily excluded improvements) against all perils of fire, extended
coverage, vandalism, malicious mischief, and special extended perils ("All
Risks," as such term is used in the insurance industry). The policy shall
include a code upgrade endorsement. In addition, Tenant shall, at Tenant's
expense, obtain and keep in force during the term of this Lease a policy or
policies of insurance covering loss or damage due to perils caused by earthquake
and/or flood if the Premises is in a certified flood zone. A stipulated value or
agreed amount endorsement deleting the co-insurance provision to the policy
shall be procured.
13.4.3 Tenant shall also obtain and keep in force during the term of
this Lease a policy of business interruption insurance covering a period of one
(1) year. This insurance shall cover all real estate taxes, insurance costs and
operating expenses for the same period in addition to one (1) year's Base
Monthly Rent.
13.4.4 Tenant shall also obtain and keep in force during the term of
this Lease a worker's compensation policy, insuring against and satisfying
Tenant's obligations and liabilities under the worker's compensation laws of the
state in which the Premises are located, including Employer's Liability
insurance, in an amount of not less than One Million Dollars ($1,000,000).
13.4.5 None of the above-required coverages shall have a deductible in
an amount greater than Ten Thousand Dollars ($10,000.00).
13.4.6 Tenant's insurance shall be primary, and any insurance Landlord
may carry, from time to time, shall be secondary and noncontributory.
<PAGE> 15
13.4.7 Tenant shall provide such other or different insurance coverage
as either Landlord or a lender of Landlord may require from time to time.
13.4.8 If, from time to time, Tenant customarily provides insurance
coverage at other of its facilities in amounts which exceed the requirements in
this Lease, or other similar facilities carry greater coverage, then Tenant
shall similarly provide such greater coverage hereunder.
13.5 ADDITIONAL INSUREDS. Tenant shall name as additional insureds on all
insurance, Landlord, Landlord's successors, assignee(s), nominee(s),
nominator(s), and agents with an insurable interest as follows:
"Landlord and, as applicable, its direct and indirect officers,
directors, shareholders, members, managers, partners and all successors,
assignee(s), subsidiaries, corporations, partnerships, proprietorships, joint
ventures, firms, and individuals as heretofore, now, or hereafter constituted on
which the named insured has the responsibility for placing insurance and for
which similar coverage is not otherwise more specifically provided."
13.6 MORTGAGE ENDORSEMENT. If requested by Landlord, the policies of insurance
required to be maintained hereunder shall bear a standard first mortgage
endorsement in favor of any holder or holders of a first mortgage lien or
security interest in the property with loss payable to such holder or holders as
their interests may appear.
13.7 RENEWALS, LAPSES OR DEFICIENCIES. Tenant shall, at least thirty (30) days
prior to the expiration of such policies or on or before such earlier date as
any lender of Landlord may require, from time to time, furnish renewal
certificates of insurance or renewal binders to Landlord and to any lender of
Landlord of which Tenant has notice. Should Tenant fail to provide to Landlord
the renewals or renewal binders, or in the event of a lapse or deficiency of any
insurance coverage specified herein for any reason, Landlord may immediately
replace the deficient insurance coverage with a policy of insurance covering the
Premises of the type and in the limits set forth above. Upon written notice from
Landlord of the placement of insurance, Tenant shall immediately reimburse
Landlord for the total cost of premiums and expense of such insurance placement.
Tenant shall not do or permit to be done anything which shall invalidate the
insurance policies. If Tenant does or permits to be done anything which shall
increase the cost of the insurance policies, then upon Landlord's demand Tenant
shall reimburse Landlord for any additional premiums attributable to any acts or
omissions or operations of Tenant causing the increase in the cost of insurance.
Notwithstanding the foregoing, however, if a lender of Landlord shall require,
at any time or from time to time, the establishment of a monthly impound account
to cover the cost of any insurance coverage required under this Lease, then
Tenant shall make such monthly deposits into such account as may be required
from time to time by such lender.
13.8 WAIVER OF SUBROGATION. Tenant and Landlord each hereby release and relieve
the other, and waive their entire right of recovery against the other, for loss
or damage caused by any peril insured against under Section 13, whether due to
the negligence of Landlord or Tenant or their agents, employees, contractors
and/or invitees to the extent that this waiver will not invalidate such
insurance. Tenant and Landlord shall, upon obtaining the policies of insurance
required hereunder, give notice to the insurance carrier or carriers that the
foregoing mutual waiver of subrogation is contained in this Lease.
13.9 EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby agrees that Landlord
shall not be liable for injury to Tenant's business or any loss of income
therefrom or for damage to the goods, wares, merchandise or other property of
Tenant or Tenant's employees, invitees, or any other person in or about the
Premises, nor shall Landlord be liable for injury to the person of Tenant,
Tenant's employees, agents, invitees or contractors, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances,
<PAGE> 16
plumbing, air conditioning or lighting fixtures, or from any other cause,
whether the said damage or injury results from conditions arising upon the
Premises or upon other portions of the Building, or from other sources or
places, and regardless of the cause of such damage or injury, and whether the
means of repairing the same is inaccessible to Tenant. Landlord shall not be
liable for any damages arising from any act or neglect of any other occupant, if
any, of any portion of the Premises.
14. PARTIAL AND TOTAL DESTRUCTION OF THE PREMISES. In the event any part or all
of the Premises shall at any time during the term of this Lease be damaged or
destroyed, regardless of cause, Tenant shall give prompt notice to Landlord.
Tenant shall repair and restore all of the Premises to their original condition,
including buildings and all other improvements, as soon as circumstances permit.
Tenant shall hold Landlord free and harmless from any and all liability
resulting from such repairs and restoration. Tenant shall pay for any cost of
repair or restoration in excess of the available insurance proceeds. Tenant is
not entitled to any rent abatement during or resulting from a utility stoppage
or disruption as well as any disturbance on or partial or total destruction of
the Premises. Tenant hereby waives the provisions of California Civil Code
Sections 1932(2) and 1933(4) and provisions of any successor or other law of
like import.
15. CONDEMNATION.
15.1 CONDEMNATION DAMAGES. In the event of the taking or conveyance of the whole
or any part of the Premises by reason of condemnation by any public or
quasi-public body, Landlord and Tenant shall represent themselves independently
in seeking damages before the condemning body. Each party shall be entitled to
the amount awarded respectively to each. Tenant shall only be entitled to make a
claim, and Landlord shall not make a claim, in such proceedings for the
following:
15.1.1 A sum attributable to the unamortized values of Tenant's
leasehold improvements or alterations, calculated based on the useful life of
such improvements or alterations for federal income tax purposes, made to the
Premises by Tenant in accordance with this Lease, which improvements or
alterations Tenant would have the right to remove from the Premises upon the
termination of the Lease pursuant to the provisions of this Lease; and
15.1.2 Tenant's moving expenses, including, without limitation, its
costs in removing its merchandise, furniture, trade fixtures, and equipment.
15.2 TERMINATION OF LEASE OR RENT ADJUSTMENT DUE TO CONDEMNATION. In the event
that a condemnation prevents or substantially impairs Tenant's ability to use
the Premises for the purposes specified in Section 8, Tenant may terminate this
Lease by giving Landlord sixty (60) days written notice of its intention to
terminate this Lease after receiving notice of the condemnation from the
condemning authority. The effective date of the termination shall be the actual
date of such taking. In the event of termination, the rent for the last month of
Tenant's occupancy shall be prorated, and Landlord shall refund to Tenant any
rent paid in advance. Tenant shall thereupon be released from its obligation to
pay rent. In the event that a condemnation does not prevent or substantially
impair Tenant's ability to use the Premises for the purposes specified in
Section 8, the Base Monthly Rent shall be reduced in proportion to the amount by
which the square footage of the Premises has been reduced by such condemnation.
16. ASSIGNMENT AND SUBLETTING.
16.1 NO TRANSFERS. Except as set forth in Section 16.2, Tenant may not, directly
or indirectly, (a) sell, assign, transfer, mortgage, pledge or hypothecate the
whole or any part of its interest under this Lease, (b) sublet the whole or any
part of the Premises, or (c) allow the occupancy of the whole or any part of the
Premises by another by license, concession, joint venture, management agreement,
or otherwise, without in each case obtaining the prior written consent of
Landlord, which consent shall not be unreasonably
<PAGE> 17
withheld, conditioned, or delayed. It is hereby deemed reasonable for Landlord
to withhold its consent, without limitation, if said decision is rendered in
good faith and is based upon the character, reputation, financial condition,
and/or business acumen and experience of Tenant's proposed successor or if
Landlord is required to obtain the consent of any lender to such proposed
subletting or assignment and, for whatever reason, such lender does not give
such consent. Likewise, any conditional or delayed response by Landlord to any
such proposed subletting or assignment shall conclusively be deemed reasonable
on the part of Landlord if caused by any corresponding conditional or delayed
response by such lender. For the purposes of this Section 16 and this Lease
generally, any of the events set forth in subsection (a), (b), or (c) above or
as provided in this Section 16.1.1, and whether being done directly or
indirectly, shall be deemed included in the references "assign," "assignment,"
"sublet," "subletting", "transfer" or any other word of like or similar import.
Without limiting the discretion of Landlord in granting or withholding consent
under this Section 16, Tenant shall not request the consent of Landlord to a
transfer, subletting or assignment (i) for any use other than the uses specified
for certain portions of the Premises in Section 8 hereof or (ii) to any party if
the quality of the business operation is or may be adversely affected thereby.
Landlord shall further not be required to consent to any assignment if Tenant
does not concurrently deliver to Landlord a reaffirmation of any guaranty of
this lease, acceptable to Landlord in its sole discretion, consenting to such
assignment. Any transfer, subletting or assignment to which Landlord has
consented shall be by an instrument in writing, satisfactory to Landlord, and
any assignee, sublessee, transferee, licensee, concessionaire or mortgagee shall
agree for the benefit of Landlord to be bound by, assume and perform all the
terms, covenants and conditions of this Lease. If Tenant transfers, sublets or
assigns its interest in this Lease, then, except in the case of one or more
subleases for not more than an aggregate of twenty five percent (25%) of the
Premises in which case the following shall not apply, the Base Monthly Rent
shall be automatically increased, but not decreased, as of the effective date of
such subletting or assignment by an amount equal to fifty percent (50%) of the
difference between the then current Base Monthly Rent and the "Fair Market
Rental Rate", which shall be determined as provided in the following subsection.
In the event of a subletting or assignment of all or any part of the Premises,
due consideration shall be given, in determining both the current Base Monthly
Rent and the Fair Market Rental Rate for the sublet or assigned portion of the
Premises, that not every part of the Premises may be of equal value to a tenant
such that any stated rental rate for the entire Premises may understate or
overstate what the corresponding rental rate for only a particular portion of
the Premises might be inasmuch as any rental rate for the entire Premises
represents a "blended" rental rate for all the different portions of the
Premises.
16.1.1 Landlord and Tenant shall each select a real estate broker with
at least ten (10) years experience leasing commercial space in the Thousand Oaks
area, and within ten (10) business days after both appraisers have been so
selected, each shall submit to the other his or her estimate of the Fair Market
Rental Rate, for Base Monthly Rent for a new lease of similar duration for the
Premises. If either broker fails to timely submit his or her estimate, such
estimate shall be disregarded and the one (1) timely estimate shall alone
constitute the Fair Market Rental Rate for the Premises. If each broker provides
a timely estimate and the higher of the two (2) is within five percent (5%) of
the lower, the two (2) shall be averaged, and such average shall be the Fair
Market Rental Rate for the Premises. If the two (2) estimates are not so within
five percent (5%), the two (2) brokers shall within an additional ten (10)
business days select a third qualified broker, who shall submit his or her
estimate to the other two (2) brokers within ten (10) business days after he or
she is selected, and the two (2) closest estimates shall be averaged, and such
average shall be the Fair Market Rental Rate for the Premises. If either party
fails timely to select its broker as provided above, the other party's broker
alone shall determine the Fair Market Rental Rate for the Premises. If the two
(2) brokers selected by Landlord and Tenant are unable to timely agree upon a
third broker, or if the third broker fails to timely submit his or her estimate,
the third broker (or a replacement therefor in the event the third broker
selected by the first two (2) has failed to timely submit his or her estimate)
shall be selected by the Landlord. Each party shall pay the fees and costs of
its broker
<PAGE> 18
and fifty percent (50%) of the fees and costs of the third broker (if one is
required). In determining the Fair Market Rental Rate, Landlord and Tenant, and
all brokers, if any are needed, shall look to the net effective rent payable on
leases for comparable space in buildings of comparable size, quality and
location, with due regard to the Base Monthly Rent for the Extension Terms, and
to the then-prevailing base year or other method of calculating and charging for
costs of operation, but valuing the existing improvements, if any, in the
subject space on the basis of renting to a tenant for whom said improvements are
acceptable as adequate. No deduction shall be made for customary or other
broker's fees, legal expenses, or other expense which may be saved, or for
tenant improvement allowances and/or tenant improvement construction time which
may be saved.
16.1.2 If Tenant is a corporation, limited liability company,
unincorporated association, trust, general or limited partnership or any other
entity, then the direct or indirect sale, assignment, transfer or hypothecation
of any stock or other ownership interest of such entity which from time to time
in the aggregate exceeds twenty-five percent (25%) of all such interests shall
be deemed an assignment or transfer subject to the provisions of this Section 16
and otherwise for this Lease generally. Upon the occurrence of an Event of
Default (as provided in Section 17), if the Premises (or any part thereof) have
been sublet, then Landlord, in addition to any other remedies herein provided or
provided by law, may at its option collect directly from such sublessee all
rents becoming due to Tenant under such sublease and apply such rent against any
sums due to Landlord from Tenant hereunder, and no such collection shall be
construed to constitute a novation or release of Tenant from the further
performance of Tenant's obligations under this Lease. If a permitted sublease
terminates by reason of a termination of the Lease, Landlord may, in its sole
discretion, elect, by delivering written notice to such subtenant, to assume the
obligations of Tenant under such sublease, in which event such subtenant shall
recognize Landlord as the sublandlord under the sublease as if Landlord were
Tenant under such sublease (an "Assumption"). If there shall be an Assumption,
then Landlord shall not be liable to subtenant for (a) the return of any
security deposit that may have been previously posted by such subtenant under
such sublease, (b) any construction obligation of Tenant under such sublease or
(c) any default of Tenant under such sublease, including, without limitation,
any default that may be in the nature of a continuing default commencing prior
to the Assumption and continuing thereafter. Any assignment or transfer of
Tenant's interest under this Lease, and any proposed subletting or occupancy of
the Premises not in compliance with this Section 16, shall be void and shall, at
the option of Landlord exercisable by notice to Tenant, terminate this Lease.
This Lease shall not be assignable by operation of law, except that if Tenant is
a natural person, then this Lease shall be binding upon and inure to the benefit
of the estate of Tenant.
16.1.3 If Tenant sublets any of the Club portion of the Premises for a
use that is not exclusively for the benefit of the members of Tenant's Club,
then upon the effective date of such subletting, the Base Monthly Rent for such
portion of the Premises shall be the greater of (i) Fair Market Rental Rate (as
defined above) or (ii) the Base Monthly Rent payable immediately before such
event.
16.2 PERMITTED TRANSACTIONS.
16.2.1 Notwithstanding anything to the contrary contained in this
Section 16, the issuance or trading of stock registered under the Securities
Exchange Act of 1934, as amended, shall not be deemed to result in an assignment
hereunder, and shall not require the prior written consent of the Landlord.
16.2.2 Notwithstanding anything to the contrary contained in this
Section 16, Tenant may assign its interest in this Lease or sublet any part of
the Premises, without the prior written consent of Landlord, to (i) any
corporation or other entity into which or with which Tenant or its parent merges
or consolidates; (ii) any parent, subsidiary, successor or affiliated
corporation of Tenant or its parent; or (iii) any corporation or other entity
which acquires all or substantially all of the assets or issued and outstanding
<PAGE> 19
shares of capital stock of Tenant or its parent; provided, in any and each such
instance, that any such assignee or successor shall agree in writing, in form
and substance reasonably acceptable to Landlord, to assume and perform all of
the terms and conditions of this Lease on Tenant's part to be performed. In the
event of any transaction of a type described in this Section 16.2.2 that
involves a change in control or in the event of any other transaction that,
directly or indirectly, involves a change in control, and as to the Club's
portion a change in use (even with Landlord's consent which is required), then
the Base Monthly Rent immediately following such event shall be automatically
increased, but not decreased, as of the effective date of such change by an
amount equal to fifty percent (50%) of the difference between the then current
Base Monthly Rent and the Fair Market Rental Rate for the Premises (as defined
above); provided, however, for the purpose of this calculation (A) during the
initial ten years of the Term the then current Base Monthly Rent for the
Premises shall be deemed reduced by Six Thousand Six Hundred Sixty Seven Dollars
($6,667) per month and (B) for the Base Monthly Rent payable pursuant to
Subsections 4.3.1, 4.3.2, 4.3.3, 4.3.4 and 4.3.5, if applicable, shall each
increase, but not decrease, by the same percentage increase as the increase as a
result of the provision of this Subsection. As used in this Section 16.2.2, a
transaction, or series of transactions, shall result in a "change in control"
if, as a result of such transaction or series of transactions, there shall have
been a change in the person or persons having the ultimate power, directly or
indirectly and whether through the ownership of equity interests (whether
limited partnership interests, limited liability company interests, stock,
and/or any other interests), the ownership of debt instruments or by contract
right, to direct the Tenant.
16.2.3 Notwithstanding anything to the contrary contained in this
Section 16, Tenant may sublet up to 25% of the Club portion of the Premises for
ancillary uses typical to a Spectrum Club, in any such instance without the
prior written consent of Landlord, if (A) Tenant provides Landlord with a copy
of any such sublease promptly upon written request, from time to time, by
Landlord, (B) except for the economic terms of any such sublease, the terms and
conditions of such sublease are consistent with the terms and conditions of this
Lease and (C) any such subtenant agrees, in its sublease as regards itself and
its sublease, to provide directly to Landlord, from time to time, the
information specified in Sections 22.3 and 23.2.
16.2.4 Notwithstanding anything to the contrary contained in this
Section 16, Tenant may sublease the Office Space portion of the Premises for
general office use, and no other use, in any such instance without the prior
written consent of Landlord but subject to the requirements of any lender of
Landlord, if (A) Tenant provides Landlord with a copy of any such sublease
promptly when executed and thereafter promptly upon written request, from time
to time, by Landlord, (B) except for the economic terms of any such sublease,
the terms and conditions of such sublease are consistent with the terms and
conditions of this Lease, (C) any such subtenant agrees, in its sublease as
regards itself and its sublease, to provide directly to Landlord, from time to
time, the information specified in Sections 22.3 and 23.2 and (D) the economic
terms and conditions of any such sublease, when taken as a whole, are no more
favorable to such subtenant than market conditions for comparable office space
in Thousand Oaks, California at the time of such sublease.
16.3 LANDLORD'S ADDITIONAL RIGHTS RE CLUB SUBLETTING. If (i) Tenant (or an
approved sublessee) desires to sublet any portion of the Club portion of the
Premises for a use other than that specified in Section 8, and (ii) the portion
of the Club portion of the Premises so desired to be sublet shall, when
aggregated with all other portions of the Premises then being sublet for any use
other than that specified in Section 8, account for more than twenty-five
percent (25%) of the Club portion of the Premises, then Tenant shall give not
less then ninety (90) days' prior written notice thereof to Landlord setting
forth the name of the proposed subtenant, the term, rental rate and all other
relevant particulars of the proposed subletting, including without limitation,
evidence satisfactory to Landlord that the proposed sublessee will immediately
occupy and thereafter use the sublet portion of the Premises for the entire term
of the sublease. In addition to
<PAGE> 20
Landlord's right of approval pursuant to Section 16.1, Landlord shall have the
option, if any such subletting is proposed, to cancel this Lease as to the
affected portion of the Premises as of the proposed effective date of the
subletting set forth in Tenant's notice. The option shall be exercised, if at
all, by Landlord giving Tenant written notice thereof within sixty (60) days
following Landlord's receipt of Tenant's written request. Upon any such
cancellation, Tenant shall pay to Landlord all amounts, as estimated by
Landlord, payable by Tenant to such termination date with respect to that
portion of any obligations, costs or charges which are the responsibility of
Tenant under this Lease allocable to the affected portion of the Club portion of
the Premises. Further, upon any such cancellation, (a) Landlord and Tenant shall
have no further obligations or liabilities to each other with respect to the
affected portion of the Club portion of the Premises, except with respect to
obligations or liabilities which have accrued as of such cancellation date (in
the same manner as if such cancellation date were the date originally fixed for
the expiration of the term) and (b) if less than all of the Club portion of the
Premises are sublet, then the rent payable under Section 4 shall be reduced by
the lesser of (i) a prorated reduction of rent based upon the area of the sublet
portion as compared with the entire Premises, (ii) the base rent payable as set
forth in the proposed sublease, and (iii) Landlord's reasonable allocation as
between the sublet portion and the remainder of the Premises. Upon any such
cancellation, any new tenant (and any such new tenant's employees, licensees and
invitees) to whom Landlord may elect, from time to time, to lease any or all of
the affected portion of the Premises shall be entitled to undisturbed ingress
and egress through the unaffected portion of the Premises still leased by Tenant
if and to the extent reasonably necessary for such new tenant to access its new
premises but subject to Tenant's rules of operation for its Club applied in a
consistent and nondiscriminatory manner. Without limitation, Landlord may lease
the affected portion of the Club portion of the Premises to the proposed
sublessee, without liability to Tenant. Landlord's failure to exercise said
cancellation right as herein provided shall not be construed as Landlord's
consent to the proposed subletting.
16.4 LANDLORD'S ADDITIONAL RIGHTS RE ASSIGNMENT. Tenant shall in no event assign
less than its entire interest in this Lease. If Tenant desires to assign all
(but not less than all) of its interest in this Lease, Tenant shall give not
less than ninety (90) days' prior written notice thereof to Landlord setting
forth the name of the proposed assignee, the terms of the assignment, and any
other relevant particulars of the proposed assignment. In addition to Landlord's
right of approval pursuant to Section 16.1, Landlord shall have the option, if
any such assignment is proposed, to cancel this Lease as of the proposed
effective date of the assignment set forth in Tenant's notice. The option shall
be exercised, if at all, by Landlord giving Tenant written notice thereof within
sixty (60) days following Landlord's receipt of Tenant's written request. Upon
any such cancellation, Tenant shall pay to Landlord all amounts, as estimated by
Landlord, payable by Tenant to such termination date with respect to any
obligations, costs or charges which are the responsibility of Tenant under this
Lease. Further, upon any such cancellation, Landlord and Tenant shall have no
further obligations or liabilities to each other under this Lease, except with
respect to obligations or liabilities which have accrued as of such cancellation
date (in the same manner as if such cancellation date were the date originally
fixed for the expiration of the term). Without limitation, Landlord may lease
the Premises to the proposed assignee, without liability to Tenant. Landlord's
failure to exercise said cancellation right as herein provided shall not be
construed as Landlord's consent to the proposed assignment.
16.5 NO RELEASE OF TENANT. Regardless of Landlord's consent, no subletting or
assignment shall release Tenant of Tenant's obligation or alter the primary
liability of Tenant to pay Base Monthly Rent and to perform all other
obligations to be performed by Tenant hereunder. The acceptance of rent by
Landlord from any other person shall not be deemed to be a waiver by Landlord of
any provision hereof. Consent to one (1) assignment or subletting shall not be
deemed consent to any subsequent assignment or subletting. If any assignee of
Tenant or any successor of Tenant defaults in the performance of any of the
terms hereof, then Landlord may proceed directly against Tenant without the
necessity of exhausting remedies against said assignee. Landlord may consent to
subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees of Tenant without notifying Tenant or
any successor of Tenant and without obtaining its or their consent thereto, and
such action shall not relieve Tenant of liability under
<PAGE> 21
the Lease. In this regard, Tenant waives any rights or defenses of a surety,
including without limitation any set forth in California Civil Code Sections
2809, 2810, 2814, 2815, 2819, 2825, 2839, 2845 through 2850, 2899 and 3433, in
Article 3 of the California Commercial Code and in any other relevant statutes
now or hereafter enacted.
16.6 LANDLORD'S RIGHT OF ASSIGNMENT. Landlord shall be free at all times,
without need of consent or approval by Tenant, to assign its interest in this
Lease and/or to convey fee title to the Premises. Each conveyance by Landlord of
Landlord's interest in the Lease or the Premises prior to expiration or
termination hereof shall be subject to this Lease and shall relieve the grantor
of any further obligations or liability as Landlord, and Tenant shall look
solely to Landlord's successor in interest for all future obligations of
Landlord. Tenant hereby agrees to attorn to Landlord's successors in interest,
whether such interest is acquired by sale, transfer, foreclosure, deed in lieu
of foreclosure, or otherwise pursuant to the terms and conditions set forth in
Section 22.2 herein. The term "Landlord" as used in this Lease, so far as
covenants and obligations on the part of Landlord are concerned, shall be
limited to mean and include only the owner at the time in question of the fee
title of the Premises. Without further agreement, the transferee of such title
shall be deemed to have assumed and agreed to observe and perform any and all
obligations of Landlord hereunder during its ownership of the Premises.
17. DEFAULT AND TERMINATION.
17.1 EVENTS OF DEFAULT. The occurrence of any of the following events (each an
"Event of Default") shall constitute a default by Tenant:
17.1.1 Failure by Tenant to pay rent within five (5) days of when due.
17.1.2 Failure by Tenant to perform or comply with any provision of this
Lease (other than as set forth in Subsections 17.1.1, 17.1.4, 17.1.5, 17.1.6,
17.1.7 and 17.1.8) if the failure is not cured within thirty (30) days after
notice has been given to Tenant. If, however, the failure cannot reasonably be
cured within such thirty (30) day cure period, Tenant shall not be in default of
this Lease if Tenant commences to cure the failure within the cure period and
diligently and in good faith continues to cure the failure; provided that if
required by any lender, from time to time, then not more than an additional
ninety (90) days shall elapse before a cure is completed.
17.1.3 To the extent permitted by law, (i) a general assignment by
Tenant or any guarantor of this Lease for the benefit of creditors, or (ii) the
filing by or against Tenant or any guarantor of any proceeding under any
insolvency or bankruptcy law, unless in the case of a proceeding filed against
Tenant or any guarantor the same is dismissed within sixty (60) days, or (iii)
the appointment of a trustee or receiver to take possession of all or
substantially all of the assets of Tenant or any guarantor, unless possession is
restored to Tenant or such guarantor within (30) days, or (iv) any execution or
other judicially authorized seizure of all or substantially all of Tenant's
assets located upon the Premises or of Tenant's interest in this Lease, unless
such seizure is discharged within thirty (30) days.
17.1.4 Failure by Tenant to timely deliver any estoppel certificate
pursuant to Section 22.3.
17.1.5 The vacating of the Club by Tenant without the intention to
reoccupy same, or the abandonment of the Club by Tenant.
17.1.6 The vacating of a material part of the Office Space by office
subtenants without Tenant's intention, and continuing diligent efforts, to
release the same, or the abandonment of a material part of the Office Space by
Tenant and its office subtenants.
<PAGE> 22
17.1.7 The discovery by Landlord that any financial statement given to
Landlord by Tenant, any assignee of Tenant, any subtenant of Tenant, any
successor in interest of Tenant or any guarantor was materially false.
17.1.8 Failure by Tenant to timely deliver any Non-Disturbance Agreement
pursuant to Section 22.1.
17.1.9 [INTENTIONALLY OMITTED].
17.1.10 If the performance of Tenant's obligations under this Lease is
guaranteed: (i) the termination of a guarantor's liability with respect to this
Lease other than in accordance with the terms of such guaranty, (ii) a
guarantor's refusal to honor its guaranty, (iii) a guarantor's breach of its
guaranty obligation on an anticipatory breach basis and Tenant's failure, within
sixty (60) days following written notice by or on behalf of Landlord to Tenant
of any such event, to provide Landlord with written alternative assurance or
security, which, when coupled with the then existing resources of Tenant, equal
or exceeds the combined financial resources of Tenant and the guarantor that
existed at the time of execution of this Lease or (iv) the default by any
guarantor under its guaranty, or the attempt by any such guarantor to revoke,
terminate or otherwise limit said guaranty.
17.2 LANDLORD'S REMEDIES. Landlord shall have any one or more of the following
remedies after the occurrence of an Event of Default by Tenant. These remedies
are not exclusive; they are cumulative in addition to any remedies now or later
allowed by law, in equity, or otherwise:
17.2.1 Terminate this Lease by giving written notice of termination to
Tenant, in which event Tenant immediately shall surrender the Premises to
Landlord. If Tenant fails to so surrender the Premises, then Landlord, without
prejudice to any other remedy it has for possession of the Premises or
arrearages in rent or other damages, may reenter and take possession of the
Premises and expel or remove Tenant and any other person or entity occupying the
Premises or any part thereof, without being liable for any damages, whether
caused by the negligence of Landlord or otherwise. Tenant hereby waives the
protection available under Code of Civil Procedure Sections 1174 and 1179 and
any related sections presently existing or hereinafter enacted. In the event of
any termination of this Lease, Landlord shall have the immediate right to enter
upon and repossess the Premises, and any personal property of Tenant may be
removed from the Premises and stored in any public warehouse at the risk and
expense of Tenant.
17.2.2 No act by Landlord other than giving notice of termination to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest under this Lease shall not constitute a termination of this
Lease. On termination of the Lease, Landlord shall have the right to recover
from Tenant:
17.2.2.1 The worth at the time of the award of the unpaid rent that had
been earned at the time of termination of this Lease; and
17.2.2.2 The worth at the time of the award of the amount by which the
unpaid rent that would have been earned after the date of termination of this
Lease if the Lease had not been terminated until the time of award exceeds the
amount of the loss of rent that Tenant proves reasonably could have been
avoided; and
17.2.2.3 The worth at the time of the award of the amount by which the
unpaid rent that would have been earned if the Lease had not been terminated for
the balance of the term after the time of award exceeds the amount of the loss
of rent that Tenant proves reasonably could have been avoided; and
<PAGE> 23
Any other amount, including court costs, necessary to compensate Landlord for
all detriment proximately caused by Tenant's default.
17.2.2.4 The phrase "worth at the time of the award" as used in clauses
17.2.2.1 and 17.2.2.2 above is to be computed by allowing interest at the rate
of twelve percent (12%) per annum, but not to exceed the then legal rate of
interest. The same phrase as used in clause (iii) above is to be computed by
discounting the amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus one percent (1%).
17.2.3 Landlord may re-enter and take possession of the Premises without
terminating this Lease and without being liable for any damages, whether caused
by the negligence of Landlord or otherwise. Landlord may relet the Premises, or
any part of them, to third parties, but has no obligation to do so. Landlord may
relet the Premises on whatever terms and conditions Landlord, in its reasonable
discretion, deems advisable. Reletting can be for a period shorter or longer
than the remaining term of this Lease. Landlord's action under this Subsection
is not considered an acceptance of Tenant's surrender of the Premises unless
Landlord so notifies Tenant in writing. Tenant shall be immediately liable to
Landlord for all costs Landlord incurs in reletting the Premises, including,
without limitation, brokers' commissions, expenses of remodeling the Premises as
required by the reletting, and like costs. Tenant shall pay to Landlord the rent
due under this Lease on the dates the rent is due, less the rent Landlord
receives from any reletting.
17.2.3.1 If Landlord elects to relet the Premises without terminating
this Lease, any rent received will be applied to the account of Tenant, not to
exceed Tenant's total indebtedness to Landlord; no reletting by Landlord is
considered to be for its own account unless Landlord has notified Tenant in
writing that the Lease has been terminated. If Landlord elects to relet the
Premises, rent that Landlord receives from reletting will be applied to the
payment of: (i) first, any indebtedness from Tenant to Landlord other than rent
due from Tenant; (ii) second, all costs, including maintenance, incurred by
Landlord in reletting; and (iii) third, rent due and unpaid under the Lease.
After deducting the payments referred to in this Subsection, any sum remaining
from the rent Landlord receives from reletting will be held by Landlord and
applied in payment of future rent as rent becomes due under this Lease. If, on
the date rent is due under this Lease, the rent received from the reletting is
less than the rent due on that date, Tenant will pay to Landlord, in addition to
the remaining rent due, all costs, including maintenance, Landlord incurred in
reletting which remain after applying the rent received from the reletting.
Tenant shall have no right to or interest in the rent or other consideration
received by Landlord from reletting to the extent it exceeds Tenant's total
indebtedness to Landlord.
17.2.3.2 The purpose of this Section 17.2.3 is to give Landlord the
remedy described in California Civil Code Section 1951.4 (lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to reasonable
limitations); it being agreed that the restrictions imposed by this Lease on
Tenant's right to sublet or assign are reasonable.
17.2.4 Re-enter the Premises without terminating this Lease and without
being liable for any damages, whether caused by the negligence of Landlord or
otherwise, and do whatever Tenant is obligated to do under the terms of this
Lease. The expenses incurred by Landlord in affecting compliance with Tenant's
obligations under this Lease immediately shall become due and payable to
Landlord as additional rent.
<PAGE> 24
17.2.5 In all events, Tenant is liable for all damages of whatever kind
or nature, direct or indirect, suffered by Landlord as a result of the
occurrence of an Event of Default. If Tenant fails to pay Landlord in a prompt
manner for the damages suffered, Landlord may pursue a monetary recovery from
Tenant. Included among these damages are all expenses incurred by Landlord in
repossessing the Premises (including, but not limited to, increased insurance
premiums resulting from Tenant's vacancy), all expenses incurred by Landlord in
reletting the Premises (including, but not limited to, those incurred for
advertisements, brokerage fees, repairs, remodeling to the Premises, and
replacements), all concessions granted to a new tenant on a reletting, all
losses incurred by Landlord as a result of Tenant's default (including, but not
limited to, any unamortized commissions paid in connection with this Lease), a
reasonable allowance for Landlord's administrative costs attributable to
Tenant's default, and all reasonable attorneys, fees incurred by Landlord in
enforcing any of Landlord's rights or remedies against Tenant.
17.2.6 Pursuit of any of the foregoing remedies does not constitute an
irrevocable election of remedies nor preclude pursuit of any other remedy
provided elsewhere in this Lease or by applicable law, and none is exclusive of
another unless so provided in this Lease or by applicable law. Likewise,
forbearance by Landlord to enforce one or more of the remedies available to it
on an Event of Default does not constitute a waiver of that default or of the
right to exercise that remedy later or of any rent, damages, or other amounts
due to Landlord hereunder.
17.2.7 Whether or not Landlord elects to terminate this Lease or
Tenant's right to possession of the Premises on account of any default by
Tenant, Landlord shall have all rights and remedies at law or in equity,
including, but not limited to, the right to re-enter the Premises and, to the
maximum extent provided by law, Landlord shall have the right to terminate any
and all subleases, licenses, concessions, or other consensual arrangements for
possession entered into by Tenant and affecting the Premises or, in Landlord's
sole discretion, may succeed to Tenant's interest in such subleases, licenses,
concessions, or arrangements. In the event of Landlord's election to succeed to
Tenant's interest in any such subleases, licenses, concessions, or arrangements,
Tenant shall have no further right to or interest in the rent or other
consideration receivable thereunder as of the date of notice by Landlord of such
election.
17.3 LATE CHARGE. If Tenant fails to pay when due any payment of rent or other
charges which Tenant is obligated to pay to Landlord under this Lease, there
shall be a late charge in the amount of (a) five percent (5%) or (b) if higher,
such higher amount, from time to time, as may apply to any late payment under
any loan secured by the Premises, of each such obligation. This sum is intended
to compensate for accounting and administrative expenses incurred, as well as
the loss of the use of funds. In addition to the late charge, any and all rent
or other charges which Tenant is obligated to pay to Landlord under this Lease
which are unpaid shall bear interest at the rate set forth in Section 17.5 from
the date said payment was due until paid.
17.4 SURRENDER OF PREMISES. No act or thing done by Landlord or any agent or
employee of Landlord during the Lease term shall be deemed to constitute an
acceptance by Landlord or a surrender of Premises unless such intent is
specifically acknowledged in a writing signed by Landlord. The delivery of keys
to the Premises to Landlord or any agent or employee of Landlord shall not
constitute a surrender of the Premises or effect a termination of this Lease,
whether or not the keys are thereafter retained by Landlord and, notwithstanding
such delivery, Tenant shall be entitled to the return of such keys at any
reasonable time upon request until this Lease shall have been terminated
properly. The voluntary or other surrender of this Lease by Tenant, whether
accepted by Landlord or not, or a mutual termination hereof, shall not work a
merger, and at the option of Landlord shall operate as an assignment to Landlord
of all subleases or subtenancies affecting the Premises.
17.5 INTEREST CHARGES. Any amount not paid by one party to the other when due to
the other party will bear interest from the date due at the lower of (i) the
default rate of interest under any loan secured, in
<PAGE> 25
whole or in part, by the Premises, or any part thereof, or, if there shall be no
such loan, then the prime commercial rate being charged by the Bank of America
N.A. in effect on the date due plus two percent (2%) per annum; and (ii) the
maximum rate permitted by law. If Bank of America N.A. is no longer in
existence, then another comparable bank or financial institution shall be
substituted by Landlord.
17.6 DEFAULT BY LANDLORD. Landlord shall be in default if Landlord fails to
perform any provision of this Lease required of it and the failure is not cured
within thirty (30) days after notice has been given to Landlord. If, however,
the failure cannot reasonably be cured within such thirty (30) day cure period,
Landlord shall not be in default of this Lease if Landlord commences to cure the
failure within the cure period and diligently and in good faith continues to
cure the failure. Notices given under this Section 17.6 shall specify the
alleged breach and the applicable Lease provisions and shall, in order to be
valid, be given concurrently to any lender holding a mortgage, deed of trust or
other security interest in the Premises. If Landlord has failed to cure a
default within the required period, such lender shall have an additional thirty
(30) days within which to cure the same or, if such default cannot be cured
within that period, such additional time as may be necessary if within such
thirty (30) day period said lender has commenced and is diligently pursuing the
actions or remedies necessary to cure the breach, default, or noncompliance
involved (including, but not limited to, commencement and prosecution of
proceedings to foreclose or otherwise exercise its rights under its mortgage or
other security instrument, if necessary to effect such cure), in which event
this Lease shall not be terminated by Tenant so long as such actions or remedies
are being diligently pursued by said lender.
17.7 IMPOUNDS. If a late charge is payable hereunder, whether or not collected,
for three (3) consecutive installments of rent or for three (3) consecutive
installments of other monetary obligations of Tenant under the terms of this
Lease, then Tenant shall pay to Landlord, if Landlord shall so request and if no
lender is then requiring any such impounds, in addition to any other payments
required under this Lease, a monthly advance installment (as estimated by
Landlord) payable at the same time as the monthly rents for real property tax
and insurance expenses on the Premises which are payable by Tenant under the
terms of this Lease. Such fund shall be established to insure payment when due,
before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Landlord by Tenant under the provisions of this
paragraph are insufficient to discharge the obligations of Tenant to pay such
real property taxes and insurance premiums as the same become due, then Tenant
shall pay to Landlord, upon Landlord's demand, such additional sums necessary to
pay such obligations. All moneys paid to Landlord under this paragraph may be
intermingled with other moneys of Landlord and shall not bear interest for the
benefit of Tenant. If Tenant defaults in the performance of Tenant's obligations
under this Lease, then any balance remaining from funds paid to Landlord under
the provisions of this paragraph may, at the option of Landlord, be applied to
the payment of any monetary default of Tenant in lieu of being applied to the
payment of real property tax and insurance premiums.
18. RIGHT OF INSPECTION. Landlord, Landlord's lender(s) and any authorized
representatives thereof shall have the right after seventy-two (72) hours prior
written notice to Tenant, except in the event of an emergency in which case no
notice is required, to enter upon the Premises from time to time and at all
reasonable hours for the purpose of inspecting the Premises, making repairs,
additions, or alterations in or upon the Premises or exhibiting the Premises to
prospective tenants, purchasers, lenders or others. Provided Tenant is not in
default beyond any applicable cure period, Landlord shall not exhibit any "for
sale", "for rent" or like signs, except pending the cure of any default or
during the final one hundred eighty (180) days of the term of the Lease.
19. WAIVER OF BREACH. No waiver by Landlord of any breach of any one or more of
the terms, covenants, conditions, or agreements of this Lease shall be deemed to
imply or constitute a waiver of any succeeding or other breach. Failure of
Landlord to insist upon the strict performance of any of the terms, conditions,
covenants, and agreements of this Lease shall not constitute or be considered as
a waiver or
<PAGE> 26
relinquishment of Landlord's rights to subsequently enforce any default, term,
condition, covenant, or agreement, which shall all continue in full force and
effect. The rights and remedies of Landlord under this Lease shall be cumulative
and in addition to any and all other rights and remedies which Landlord has or
may have.
20. NOTICES.
20.1 NOTICE REQUIREMENTS. All notices, requests, or demands herein provided to
be given or made, or which may be given or made by either party to the other,
shall be given or made only in writing and shall be deemed to have been duly
given: (i) when delivered personally at the address set forth below, or to any
registered agent of the party to whom notice is being given; or (ii) on the date
delivered when sent via Overnight Mail or reputable overnight delivery service
such as, without limitation, Federal Express, properly addressed and postage
prepaid with proof of delivery; or (iii) on the date sent via facsimile
transmission with a concurrent copy being sent by another approved means
hereunder; or (iv) seventy-two (72) hours after the time the same is deposited
in the United States mail, properly addressed and first class postage prepaid,
return receipt requested. The proper address to which notices, requests, or
demands may be given or made by either party shall be the address set forth at
the end of this Section or to such other address or to such other person as any
party shall designate such address may be changed by written notice given to the
other party in accordance with this Section.
If to Tenant: The Spectrum Club Company, Inc.
Attn: Real Estate Notices
11100 Santa Monica Boulevard, Suite 300
West Los Angeles, California 90025
Phone number: (310) 479-5200
Fax number: (310) 479-4350
If to Landlord: West Hollywood Property Limited Partnership
1990 Westwood Boulevard, 3rd Floor
Los Angeles, California 90025
Attention: Les E. Lederer
Phone number: 310/470-6380
Fax number: 310/474-0470
-and-
2400 Willow Lane Associates Limited Partnership
11100 Santa Monica, Suite 300
Los Angeles, California 90025
Attention: Michael Talla
Phone number: 310/479-5200
Fax number: 310/479-4350
20.2 PAYMENTS UNDER LEASE. Rent and all other payments due to Landlord under
this Lease shall be paid in lawful money of the United States of America without
offset or deduction to the name and at the address first given above or to such
other persons or parties or at such other places as Landlord may from time to
time designate in writing.
21. RELATIONSHIP OF THE PARTIES. This Lease shall not be deemed or construed by
the parties, nor by any third party, as creating the relationship of (i)
principal and agent, (ii) partnership, or
<PAGE> 27
(iii) joint venture between the parties. Neither the method of computation of
rent nor any other provision of this Lease, nor any acts of the parties are
other than in the relationship of Landlord and Tenant.
22. SUBORDINATION, NON-DISTURBANCE ATTORNMENT AND ESTOPPEL.
22.1 SUBORDINATION AND NON-DISTURBANCE. Subject to the provisions of this
Section, this Lease and the leasehold estate created hereby shall be, at the
option and upon written declaration of Landlord, subject, subordinate, and
inferior to the lien and estate of any liens, trust deeds, and encumbrances
("Mortgages"), and all renewals, extensions, or replacements thereof, now or
hereafter imposed by Landlord upon the Premises; provided, however, that this
Lease shall not be subordinate to any Mortgage arising after the date of this
Lease, or any renewal, extension, or replacement thereof, unless and until
Landlord provides Tenant with an agreement ("Non-Disturbance Agreement"), signed
and acknowledged by each holder of any such interest, setting forth that, so
long as Tenant is not in default hereunder, Landlord's and Tenant's rights and
obligations hereunder shall remain in force and Tenant's right to possession
shall be upheld. If any mortgagee, trustee or ground lessor shall elect to
subordinate the lien of its mortgage, deed of trust or ground lease to this
Lease, and shall give written notice thereof to Tenant, then this Lease shall be
deemed prior to such mortgage, deed of trust, or ground lease whether this Lease
is dated prior or subsequent to the date of said mortgage, deed of trust or
ground lease or the date of recording thereof. The Non-Disturbance Agreement may
contain such additional provisions regarding nondisturbance, subordination and
attornment as are customarily requested by secured lenders with liens
encumbering real property security similar to the Premises. Tenant shall, within
ten (10) days following a request by Landlord, execute, acknowledge and deliver
the Non-Disturbance Agreement, and any other subordination agreement or other
documents required to establish of record the priority of any such encumbrance
over this Lease. Tenant's failure to execute such documents within ten (10) days
after written demand shall constitute an Event of Default by Tenant hereunder,
or, at Landlord's option, Landlord shall execute such documents on behalf of
Tenant as Tenant's attorney-in-fact. Tenant does hereby make, constitute and
irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name,
place and stead, to execute such documents in accordance with this Section. In
addition, as long as they do not materially increase Tenant's monetary
obligations or materially diminish Tenant's rights hereunder, Tenant agrees to
make such modifications to this Lease as may be required by a lender not
affiliated with Landlord in connection with the obtaining of financing or
refinancing of the Premises. In addition, even if any such modification did
materially increase Tenant's monetary obligations or materially diminish
Tenant's rights hereunder, Tenant nonetheless still shall make such modification
if (i) it is a reasonable modification for such lender to require under the
circumstances and (ii) Landlord, in its sole discretion, elects, as between
Landlord and Tenant, to bear any increased costs resulting from such
modification that otherwise would be borne by Tenant.
22.2 ATTORNMENT. In the event of foreclosure of any Mortgage, whether superior
or subordinate to this Lease, then (i) this Lease shall continue in force; (ii)
Tenant's quiet possession shall not be disturbed unless this Lease is otherwise
terminated pursuant to its terms; (iii) Tenant shall attorn to and recognize the
mortgagee or purchaser at foreclosure sale ("Successor Landlord") as Tenant's
landlord for the remaining term of this Lease; and (iv) the Successor Landlord
shall not be bound by (a) any security deposit or payment of rent for more than
one month in advance; (b) any amendment, modification, or ending of this Lease
without the Successor Landlord's consent after the Successor Landlord's name is
given to Tenant pursuant to the notice requirements set forth in Section 20.1
herein, unless the amendment, modification, or ending is specifically authorized
by the original Lease and does not require Landlord's prior agreement or
consent; and (c) any liability for any act or omission of a prior Landlord.
22.3 TENANT'S ESTOPPEL CERTIFICATE. Tenant shall execute and deliver to
Landlord, from time to time and within ten (10) days after receipt of Landlord's
request, any estoppel certificate or other statement to be furnished to any
prospective purchaser of or any lender against the Premises. Such estoppel
certificate shall acknowledge and certify, without limitation, each of the
following matters, to the extent each may
<PAGE> 28
be true: that this Lease is in effect and not subject to any rental offsets,
claims, or defenses to its enforcement; the commencement and termination dates
of the term; that Tenant is paying rent on a current basis; that any
improvements required to be furnished under the Lease have been completed in all
respects; that the Lease constitutes the entire agreement between Tenant and
Landlord relating to the Premises; that Tenant has accepted the Premises and is
in possession thereof; that the Lease has not been modified, altered, or amended
except in specified respects by specified instruments; and that Tenant has no
notice of any prior assignment, hypothecation, or pledge of rents or the Lease.
Tenant shall also, upon request of Landlord, certify and agree for the benefit
of any lender against the Premises that Tenant will not look to such lender: as
being liable for any act or omission of Landlord; as being obligated to cure any
defaults of Landlord under the Lease which occurred prior to the time such
lender, its successors or assigns, acquired Landlord's interest in the Premises
by foreclosure or otherwise; as being bound by any payment of rent or additional
rent by Tenant to Landlord for more than one (1) month in advance; as being
bound by Landlord to any amendment or modification of the Lease without such
lender's written consent; or as being obligated to return any security deposit.
22.3.1 If Tenant does not deliver such estoppel certificate or statement
to Landlord within such ten (10) day period, in addition to the remedies of
Landlord under Section 17.2, Landlord, and any prospective purchaser or
encumbrancer, may conclusively presume and rely upon the following facts: (i)
that the terms and conditions of this Lease have not been changed except as
otherwise represented by Landlord; (ii) that this Lease has not been cancelled
or terminated except as otherwise represented by Landlord; (iii) that not more
than one month's Base Monthly Rent or other charges have been paid in advance;
(iv) that Landlord is not in default under this Lease and (v) the security
deposit has not been increased from the amount stated in Section 7. In such
event, Tenant shall be estopped from denying the truth of such facts. In
addition, Tenant shall be liable for any consequential damages suffered by
Landlord as a result of the Event of Default described in Section 17.1.4.
23. TENANT'S FINANCIAL STATEMENTS. From time to time during the term of the
Lease and within ten (10) days of any request by Landlord, Tenant shall provide
Landlord with Tenant's current and past three (3) years profit and loss
statements, balance sheet, statement of changes in financial position, and notes
to the financial statements both for Tenant's operations as a whole and for the
operations of the Premises (and each component thereof) separately, in each
case, either audited by an independent certified public accountant or accounting
firm or certified by Tenant's Chief Financial Officer.
24. ATTORNEYS' FEES.
24.1 RECOVERY OF ATTORNEYS' FEES AND COSTS OF SUIT. Tenant shall reimburse
Landlord, upon demand, for any costs or expenses incurred by Landlord in
connection with any breach or default under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights, or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. Such attorneys' fees and costs shall be paid by the losing party in such
action.
24.2 PARTY TO LITIGATION SUBJECT TO SECTION 24.1. Subject to Section 24.1,
Tenant shall indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands, and liability incurred by Landlord if Landlord becomes
or is made a party to any claim or action (i) instituted by Tenant, or by any
third party against Tenant, or by or against any person holding any interest
under or using the Premises by license of or agreement with Tenant; (ii) for
foreclosure of any lien for labor or material furnished to or for Tenant or such
other person; (iii) otherwise arising out of or resulting from any action or
transaction of Tenant or such other person; or (iv) necessary to protect
Landlord's interest under this Lease in a bankruptcy proceeding, or other
proceeding under Title 11 of the United States Code, as amended. Tenant shall
defend Landlord against any such claim or action at Tenant's expense with
counsel
<PAGE> 29
reasonably acceptable to Landlord or, at Landlord's election, Tenant shall
reimburse Landlord for any legal fees or costs incurred by Landlord in any such
claim or action.
24.3 LANDLORD'S CONSENT. Tenant shall pay Landlord's reasonable attorneys', fees
and other costs incurred in connection with Tenant's request for Landlord's
consent under Section 16, "Assignment and Subletting," or in connection with any
other act which Tenant proposes to do and which requires Landlord's consent.
Landlord may request a deposit from Tenant toward the payment of such reasonable
attorneys' fees and expenses as a condition precedent to considering any such
request, and such deposit shall apply against (but not limit) the amount payable
by Tenant for such attorneys' fees and expenses. Landlord shall have no
liability for damages resulting from Landlord's failure to give any consent,
approval, or instruction reserved to Landlord. Tenant's sole remedy in any such
event shall be an action for declaratory relief.
25. HAZARDOUS MATERIAL.
25.1 ENVIRONMENTAL COMPLIANCE. Tenant shall not cause or permit any Hazardous
Material to be brought upon, or used in or about the Premises by Tenant, its
agents, employees, contractors, or invitees, without the prior written consent
of Landlord (which Landlord shall not unreasonably withhold as long as Tenant
demonstrates to Landlord's reasonable satisfaction that such Hazardous Material
is necessary or useful to Tenant's business and will be used, kept, and stored
in a manner that complies with all laws relating to such Hazardous Material). If
Tenant breaches the obligations stated in the preceding sentence, if the
presence of Hazardous Material on the Premises caused or permitted by Tenant
results in contamination of the Premises, or if contamination of the Premises by
Hazardous Material otherwise exists or occurs and Landlord is not responsible
for the contamination, then Tenant shall indemnify, defend, and hold Landlord
harmless from any and all claims, judgments, damages, penalties, fines, costs,
liabilities, or losses (including, without limitation, diminution in value of
the Premises, damages for the loss or restriction on use of rentable or usable
space or of any amenity of the Premises, damages arising from any adverse impact
on marketing of space of the Premises, and sums paid in settlement of claims,
attorneys' fees, consultation fees, and expert fees) which arise during or after
the term of the Lease as a result of such contamination. This indemnification of
Landlord by Tenant includes, without limitation, costs incurred in connection
with any investigation or site conditions or any cleanup, remedial, removal, or
restoration work required by any federal, state, or local governmental agency or
political subdivision because of Hazardous Material present in the soil or
ground water on or under the Premises. Without limiting the foregoing, if the
presence of any Hazardous Material on the Premises caused or permitted by Tenant
results in any contamination of the Premises, Tenant shall promptly take all
actions at its sole expense as are recommended by environmental engineers hired
by Tenant and are necessary to return the Premises to the condition existing
prior to the introduction of any such Hazardous Material to the Premises;
provided that Landlord's approval of such actions shall first be obtained, which
approval shall not be unreasonably withheld so long as such actions would not
potentially have any material adverse long-term or short-term effect on the
Premises.
25.2 TENANT RESPONSIBLE FOR HAZARDOUS MATERIALS. Landlord and Tenant acknowledge
that Landlord may become legally liable for the costs of complying with
Environmental Laws relating to Hazardous Material which are not the
responsibility of Landlord or the responsibility of Tenant including, without
limitation, the following: (i) a change in Environmental Laws which relate to
Hazardous Material which make Hazardous Material present on the Premises as of
the Commencement Date, whether known or unknown to Landlord, a violation of such
new Environmental Laws; (ii) Hazardous Material that migrates, flows,
percolates, diffuses, or in any way moves on to or under the Premises before or
after the Commencement Date; (iii) Hazardous Material present or under the
Premises as a result of any discharge, dumping, or spilling (whether accidental
or otherwise) on the Premises by other tenants of the Premises or their agents,
employees, contractors, or invitees, or by others before or after the
Commencement Date; or (iv) any Hazardous Material present in, on, under or about
the Premises, including, without limitation, in
<PAGE> 30
the soil or ground water, before or after the Commencement Date. Accordingly,
Landlord and Tenant agree that the cost of complying with Environmental Laws
relating to Hazardous Material on the Premises for which Landlord is legally
liable during the term of the Lease shall be the responsibility and shall be
paid by Tenant. To the extent any such expense relating to Hazardous Material is
subsequently recovered or reimbursed through insurance, or recovery from
responsible third parties, or other action, Tenant shall be entitled to a
reimbursement to the extent it has paid the maintenance expense to which such
recovery or reimbursement relates.
25.3 LANDLORD NOT RESPONSIBLE FOR HAZARDOUS MATERIALS. As between Landlord and
Tenant, and notwithstanding anything to the contrary that may otherwise be
contained in the Lease, Landlord shall not be responsible for complying with any
Environmental Laws as regards any Hazardous Material in, on, under or about the
Premises of whatever type and wherever, whenever or however occurring, and
Tenant shall be solely responsible therefor.
25.4 SURVIVAL. The provisions of this Section 25 shall survive termination of
this Lease.
26. GUARANTOR.
26.1 The effectiveness of this Lease is further conditioned upon the concurrent
delivery to Landlord by Tenant of a guaranty, in form and substance identical to
that attached as Exhibit E, originally executed by The Sports Club Company,
Inc., with such guarantor's signature having been notarized.
26.2 It shall constitute an Event of Default of the Tenant under this Lease if
any such guarantor fails or refuses, upon reasonable request by Landlord, to
give any or all of the following: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the guarantor (and
of the party signing on guarantor's behalf) to obligate such guarantor on said
guaranty, and including in the case of corporate guarantor, a certified copy of
a resolution of its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signature of the persons
authorized to sign on its behalf, (b) current financial statements of guarantor
as may from time to time be requested by Landlord, (c) an estoppel certificate,
or (d) written confirmation that the guaranty is still in effect.
27. RESERVATIONS. Landlord reserves to itself the right, from time to time, to
grant, without the consent or joinder of Tenant, such easements, rights and
dedications that Landlord deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such easements, rights, dedications,
maps and restrictions do not unreasonably interfere with the use of the Premises
by Tenant. Tenant agrees to sign any documents reasonably requested by Landlord
to effectuate any such easement rights, dedication, map or restrictions.
28. GENERAL PROVISIONS.
28.1 FULL POWER AND AUTHORITY TO ENTER LEASE. Each of the parties, and each
individual signing on behalf of such party, covenants, represents and warrants
to the other party that such party, and such individual, has full power and
authority to enter into this Lease.
28.2 GENDER; NUMBER; CONSTRUCTION. The use of (i) the neuter gender includes the
masculine and feminine and (ii) the singular number includes the plural,
whenever the context requires. This Lease shall be construed neutrally and not
against the drafter
28.3 CAPTIONS. Captions in this Lease are inserted for the convenience of
reference only and do not define, describe, or limit the scope or the intent of
this Lease or any of its terms.
28.4 EXHIBITS. All attached exhibits are a part of this Lease and are
incorporated in full by this reference.
28.5 ENTIRE AGREEMENT. This Lease contains the entire agreement between the
parties relating to the transactions contemplated hereby and all prior or
contemporaneous agreements, understandings, drafts, representations and
statements, oral or written, are merged into this Lease.
<PAGE> 31
28.6 MODIFICATION. No modification, waiver, amendment, discharge, or change of
this Lease (collectively, a "Modification") shall be valid unless it is in
writing and signed by the party against which the enforcement of the
modification, waiver, amendment, discharge, or change is or may be sought. It
shall be a condition precedent to the effectiveness of any Modification that
Tenant deliver to Landlord a reaffirmation of any guaranty of this Lease,
acceptable to Landlord in its sole discretion, consenting to such Modification.
28.7 JOINT AND SEVERAL LIABILITY. If any party consists of more than one person
or entity, the liability of each such person or entity signing this Lease shall
be joint and several.
28.8 GOVERNING LAW. This Lease shall be construed and enforced in accordance
with the laws of the state of California.
28.9 TIME OF ESSENCE. Time is of the essence of every provision of this Lease.
28.10 SEVERABILITY. In the event any term, covenant, condition, or provision of
this Lease is held to be invalid, void, or otherwise unenforceable by any court
of competent jurisdiction, the fact that such term, covenant, condition, or
provision is invalid, void, or otherwise unenforceable shall in no way affect
the validity or enforceability of any other term, covenant, condition, or
provision of this Lease.
28.11 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, all terms of
this Lease shall be binding upon, inure to the benefit of, and be enforceable by
the parties and their respective legal representatives, successors, and assigns.
28.12 INDEPENDENT COVENANTS. This Lease shall be construed as though the
covenants herein between Landlord and Tenant are independent and not dependent,
and Tenant hereby expressly waives the benefit of any statute to the contrary
and agrees that if Landlord fails to perform its obligations set forth herein,
Tenant shall not be entitled to make any repairs or perform any acts hereunder
at Landlord's expense or to any offset of the rent or other amounts owing
hereunder against Landlord; provided, however, the foregoing shall in no way
impair the right of Tenant to commence a separate action against Landlord for
any violation by Landlord of the provisions hereof so long as notice is first
given to Landlord and any holder of a mortgage or deed of trust covering the
Premises (of whose address Tenant has theretofore been notified) and an
opportunity is granted to Landlord and such holder to correct such violation as
provided above.
28.13 NO VIOLATION OF COVENANTS AND RESTRICTIONS. Tenant shall not violate or
cause Landlord to violate any recorded covenants and restrictions affecting the
Premises. Tenant shall defend, indemnify, and hold harmless Landlord from any
costs or expenses incurred from such a violation.
28.14 MERGER. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, or a termination by Landlord shall not work a
merger, and shall, at the option of Landlord, terminate all or any existing
subtenancies or may, at the option of Landlord and as set forth in Section
16.1.2, operate as an assignment to Landlord of any or all of such subtenancies.
Tenant's acquisition of Landlord's interest in this Lease shall also not work a
merger.
28.15 SECURITY MEASURES. Tenant hereby acknowledges that the rent payable to
Landlord hereunder does not include the cost of guard services or other security
measures, and that Landlord shall have no obligation whatsoever to provide same.
Tenant assumes all responsibility for the protection of Tenant's property and
property under Tenant's control, and for the protection of Tenant and its
principals, employees, agents, licensees, invitees and subtenants (and their
respective principals, employees, agents, licensees and invitees) from any acts
of third parties.
28.16 INFORMATION PROVIDED. Tenant warrants and represents that all information
Tenant has provided to Landlord is to the best of Tenant's knowledge accurate
and correct and Tenant acknowledges that Landlord has relied upon such
information in entering into this Lease.
28.17 SURVIVAL OF OBLIGATIONS. All obligations of Tenant which either (a) by
their nature arise on or after the expiration or earlier termination of this
Lease, or (b) have not been satisfied on or before the expiration or earlier
termination of this Lease shall survive any expiration or earlier termination of
this Lease.
<PAGE> 32
28.18 LANDLORD'S LIABILITY. The term "Landlord" as used herein shall mean only
the owner or owners at the time in question of the fee title or a lessee's
interest in a ground lease of the Premises, and if any transfer of such title or
interest occurs, then Landlord herein named (and, in case of any subsequent
transfers, then each grantor thereof) shall be relieved from and after the date
of such transfer of all liability relating to Landlord's obligations thereafter
to be performed, provided that any funds in the hands of Landlord (or the
then-grantor at the time of such transfer) in which Tenant has an interest shall
be delivered to the grantee. The obligations contained in this Lease to be
performed by Landlord shall, subject as aforesaid, be binding on Landlord's
successors and assigns only during their respective periods of ownership.
Notwithstanding anything in this Lease to the contrary, Landlord shall have no
personal liability under any provision of this Lease, Tenant hereby agreeing to
look solely to Landlord's estate in the Premises for recourse and/or recovery
for any claim, damage, liability, or other amount arising under, relating to, or
in connection with Tenant's occupancy of and/or tenancy in the Premises; it
being further agreed that, for this purpose, the Premises shall be deemed
encumbered by a loan having a loan-to-value ratio of 70% if the Premises is
unencumbered or encumbered by a loan having a lesser loan-to-value ratio at the
time the determination of the Landlord's estate in the Premises is to be made.
28.19 HOLDING OVER. If Tenant, but only with Landlord's consent (which consent
may be withheld in Landlord's sole discretion), remains in possession of the
Premises or any part thereof after the expiration of the term hereof, then such
occupancy shall be a tenancy from month to month upon all the provisions of this
Lease pertaining to the obligations of Tenant, except at a Monthly Base Rent
equal to one hundred fifty percent (150%) of the sum of the Monthly Base Rent
otherwise due under Section 4, immediately prior to the expiration of the term
hereof, but all options and rights of first refusal, if any, granted under the
terms of this Lease shall be deemed terminated and be of no further effect
during said month to month tenancy. The foregoing provisions are in addition to
and do not affect Landlord's right of re-entry or any other rights or remedies
of Landlord hereunder or as otherwise provided at law or in equity, or both.
Tenant shall indemnify, defend and hold Landlord harmless from and against any
and all losses, costs, damages and liabilities (including attorneys' fees and
costs, and court costs) arising out of or in connection with any delay by Tenant
in surrendering and vacating the Premises, including, without limitation, any
claims made by any succeeding tenant based on any delay and any liabilities
arising out of or in connection with these claims, and Landlord's damages should
any such succeeding tenant cancel its lease based upon such holding over by
Tenant. Nothing in this Section shall be deemed to permit Tenant to retain
possession of the Premises after the expiration or sooner termination of the
term.
28.20 ARTWORK. To ensure compliance with California laws regarding rights of
artists, Tenant will not install any artwork of any nature in the Premises which
cannot be removed without damage or destruction to the artwork.
28.21 FURTHER ASSURANCES. Tenant shall, from time to time upon Landlord's
request, and at Tenant's expense, promptly execute, acknowledge and deliver any
and all such certifications, documents and writings, and otherwise promptly take
any and all such further actions, as Landlord, in good faith, may require to
effectuate the intents and purposes of this Lease.
28.22 SALE/LEASEBACK, FINANCING AND REFINANCING. Concurrently with this Lease
becoming effective, Landlord is purchasing the Premises from Tenant and
thereafter leasing the Premises back to Tenant pursuant to this Lease
(the "Sale/Leaseback"). In order to finance the Sale/Leaseback, Landlord
is pledging its interest in the Premises and this Lease to a lender,
which lender will be providing Landlord with a portion of the funds
being used by Landlord to acquire the Premises from Tenant (the "Initial
Financing"). From time to time hereafter, Landlord may refinance the
Premises, in which case Landlord would, again, pledge the Premises and
its interest in this Lease to secure any such refinancing (the Initial
Financing and any such subsequent refinancing, a "Financing"). Landlord
and one or more of its principals, directly or indirectly, are incurring
and, most likely, will incur, either directly or indirectly, certain
liabilities, both actual and contingent, in connection with the Initial
Financing and any subsequent Financing, including, without
<PAGE> 33
limitation, pursuant to one or more personal guaranties of, without
limitation, certain so-called "recourse carve-outs" and environmental
matters (collectively, "Financing Liabilities"); it being agreed,
however, that the definition of Financing Liabilities, for the purposes
of this paragraph only, shall not include any such liabilities to the
extent such liabilities (a) arise out of the willful misconduct of
Landlord or its affiliates or (b) exceed, in the case of a Financing
subsequent to the Initial Financing, the scope of the Financing
Liabilities under the Initial Financing. Tenant desires that Landlord
enter into the Sale/Leaseback, the Initial Financing and any subsequent
Refinancing and will be benefited by each thereof. As a material part of
the consideration to Landlord for entering into this Lease, but for
which Landlord would not have entered into the Sales/Leaseback and
Initial Financing, Tenant agrees to indemnify, defend and hold each of
Landlord and its affiliates harmless from and against any and all
claims, costs, damages and liabilities in any way arising out of or in
connection with any Financing Liabilities.
28.23 CIVIL CODE SECTION 1812.97 WARNING. WARNING: USE OF STEROIDS TO INCREASE
STRENGTH OR GROWTH CAN CAUSE SERIOUS HEALTH PROBLEMS. STEROIDS CAN KEEP
TEENAGERS FROM GROWING TO THEIR FULL HEIGHT; THEY CAN ALSO CAUSE HEART DISEASE,
STROKE AND DAMAGED LIVER FUNCTION. MEN AND WOMEN USING STEROIDS MAY DEVELOP
FERTILITY PROBLEMS, PERSONALITY CHANGES, AND ACNE. MEN CAN ALSO EXPERIENCE
PREMATURE BALDING AND DEVELOPMENT OF BREAST TISSUE. THESE HEALTH HAZARDS ARE IN
ADDITION TO THE CIVIL AND CRIMINAL PENALTIES FOR UNAUTHORIZED SALE, USE, OR
EXCHANGE OF ANABOLIC STEROIDS.
<PAGE> 34
<TABLE>
<CAPTION>
TENANT: LANDLORD:
<S> <C>
The Spectrum Club Company, Inc., West Hollywood Property Limited Partnership,
a California corporation a California limited partnership
By: /s/ John Gibbons By: W H Property GP Corp., Inc.
--------------------------------------
John Gibbons, its chief executive officer Its general partner
By: /s/ Les Lederer
------------------------------------
Les Lederer, its president
-and-
2400 Willow lane Associates Limited Partnership,
a California limited partnership
By: 2400 Willow Lane GP Corp., Inc.,
Its general partner
By: /s/ Michael Talla
----------------------------------
Michael Talla, its president
</TABLE>
<PAGE> 1
EXHIBIT 10.70
Athletic Club Lease dated as of November 5, 1999 by and a between
New Commonwealth Center Limited Partnership (as Landlord) and
Washington D.C. Sports Club, Inc. (as Tenant)
<PAGE> 2
ATHLETIC CLUB LEASE
BETWEEN
NEW COMMONWEALTH CENTER LIMITED PARTNERSHIP,
LANDLORD,
AND
WASHINGTON D.C. SPORTS CLUB, INC.,
TENANT.
DATED: AS OF NOVEMBER 5, 1999
FOR PREMISES IN A BUILDING
TO BE CONSTRUCTED ON
THE CITY BLOCK BOUNDED BY
AVERY, WASHINGTON, TREMONT
AND BOYLSTON STREETS,
BOSTON, MASSACHUSETTS
<PAGE> 3
ATHLETIC CLUB LEASE
THIS LEASE (this "LEASE") is made as of the 5th day of November, 1999,
by and between NEW COMMONWEALTH CENTER LIMITED PARTNERSHIP, a Massachusetts
limited partnership ("LANDLORD") and WASHINGTON D.C. SPORTS CLUB, INC., a
Delaware corporation ("TENANT").
Premises and Common Areas Premises and Common Areas.
1.1 Premises. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the space (the "PREMISES") in a building (the "BUILDING") to be
constructed on that certain parcel of real property, in which the
Improvements (as defined herein) are to be constructed, more
particularly described in Exhibit A attached hereto and made a part
hereof (the "LAND") and to constitute part of a development (the
"DEVELOPMENT") to be located on the Land. This Lease is subject to all
matters of record affecting the Property (as defined herein) and all
matters that would be revealed by an accurate survey of the Property.
The Premises are designated on the non-hatched portions of the floor
plans attached hereto as Exhibit B and made a part hereof, with all
depictions thereon being subject to normal construction variances and
tolerances, and as otherwise provided in this Lease. Landlord, at its
sole cost, shall, in accordance with the work letter agreement attached
hereto as Exhibit C and made a part hereof (the "WORK LETTER"), perform
Landlord's Work (as defined therein) and as part of Landlord's Work,
shall cause the utility connections specified in the Work Letter to be
available in the locations specified in the Work Letter.
1.2 Construction of Premises.
(1) Tenant shall cause the Premises to be improved with
improvements (the "IMPROVEMENTS") in accordance with the Work Letter
(defined as the "BUILDING IMPROVEMENTS" in the Work Letter) and, subject
to Force Majeure (as defined herein), to the extent provided herein and
within the time(s) set forth in the Work Letter. The Improvements are to
be used as a first-class athletic club facility (the "CLUB") more
particularly described in Article 8 hereof. The design of the
Improvements shall be subject to Landlord's approval, as provided in the
Work Letter. In accordance with the terms of the Work Letter, Landlord
shall provide Tenant with a contribution in an amount not to exceed Nine
Million Five Hundred Thousand and 00/100 Dollars ($9,500,000.00) (the
"LANDLORD'S CONTRIBUTION" and/or the "ALLOWANCE"). Tenant shall equip
the Club with all required Trade Fixtures (as defined herein) as may be
necessary to operate the Club in accordance with Section 8.1 hereof.
Title to the Improvements and all alterations and additions thereto and
replacements thereof (other than Trade Fixtures) thereafter constructed
or installed on the Premises shall be and remain in Landlord. All Trade
Fixtures, however, shall remain Tenant's property, subject to permitted
customary third (3rd) party financing subject to and in accordance with
Section 46 hereof, upon the expiration or earlier termination of this
Lease; provided, however, Tenant shall not have the right to remove any
Trade Fixtures until Tenant shall cure any Default (as defined
<PAGE> 4
herein) or, at the termination of the term hereof as a result of any
such Default, until Tenant complies with its payment obligations set
forth herein. "TRADE FIXTURES" means Tenant's athletic equipment and
machines and all of Tenant's furniture and other personal property not
affixed to the Premises in such a manner as to do material damage upon
their removal. The Premises and the Improvements are sometimes
hereinafter collectively referred to as the "PROPERTY."
(2) As a condition to the effectiveness of this Lease, Landlord
shall cause Millennium Partners LLC to execute and deliver to Tenant a
guaranty with respect to the Allowance in the form and substance set
forth in Exhibit F attached hereto.
1.3 Common Areas. Tenant shall have the non-exclusive right to use the
Common Areas (as defined herein), in common with other tenants and/or
occupants of the Development, subject to the Condominium Documents (as
defined herein), the CC&R (as defined herein) and any other
nondiscriminatory rules and regulations that Landlord and/or the
Condominium Association (as defined herein), as applicable, shall adopt
for the Development so long as such CC&R and rules and regulations do
not (i) materially interfere with Tenant's ability to conduct normal
business operations; (ii) materially increase Tenant's obligations under
this Lease, or (iii) materially decrease Tenant's rights under this
Lease. "COMMON AREAS" means all common areas and facilities of the
Development that are now or hereafter made available for the
non-exclusive and general use, convenience and benefit of Tenant and/or
Tenant's customers, employees, agents and invitees, including common
monuments and signs; transportation facilities areas including bus
stops, taxi-limousine stands, and bicycle parking areas; trash
enclosures; landscaped areas; areas designated as pedestrian walkways or
pedestrian bridges; and parking areas.
1.4 Control of Common Areas. Provided Landlord does not unreasonably
interfere with, hinder or obstruct Tenant's use of the Premises or
Tenant's ability to conduct business from the Premises, and does not
otherwise materially diminish any of Tenant's rights pursuant to this
Lease, Landlord reserves, the right from time to time:
(1) To make changes to the Common Areas, or their design,
including changes in the location, size, shape and number of driveways,
entrances, parking areas, loading and unloading areas, ingress, egress,
direction of traffic, landscaped areas and walkways. Landlord shall keep
Tenant apprised as to any proposed change to the Common Areas or their
design; and
(2) To close temporarily any portions of the Common Areas for
maintenance purposes so long as reasonable access to the Premises
remains available, including reasonable access from the parking areas of
the Building to the Premises.
Landlord agrees that rerouting of pedestrian walkways within the Common
Areas and/or rerouting of vehicles within the Common Areas shall not be
done in a manner which would materially hinder or obstruct Tenant's
ability to conduct business from the Premises.
<PAGE> 5
1.5 Definition of Floor Area. The term "FLOOR AREA" as used in this Lease
shall mean the rentable square footage of the Premises (or, where
applicable, of other premises located or proposed in or outside the
Development), measured from the exterior surface of building walls (and
from extensions thereof, in the case of openings), and from the exterior
surface of any demising partitions. At such time as the Improvements
have been constructed, Landlord shall deliver to Tenant a notice which
sets forth the Floor Area of the Premises together with reasonable
documentation evidencing Landlord's determination of the Floor Area of
the Premises. Tenant shall have ten (10) days following the receipt of
Landlord's notice of the determination of the Floor Area in which to
deliver to Landlord a notice objecting to such determination. In the
event Tenant does not so deliver such objection notice, then, in such
event, Landlord's calculation shall be deemed accepted by Tenant and
incorporated herein by this reference. In the event that Tenant delivers
such a notice to Landlord, Landlord and Tenant shall have thirty (30)
days in which to work together to calculate the Floor Area of the
Premises. In the event Landlord and Tenant cannot so agree, then, until
agreement is reached, either party may submit such dispute to
arbitration in accordance with the Commercial Arbitration Rules of the
Boston, Massachusetts chapter of the AAA (as defined herein) and the
party deemed less correct in such dispute shall pay the other party's
costs of such arbitration. Except as expressly provided to the contrary
in this Section 1.5, the procedure for arbitration shall be governed by
the proceedings set forth in Section 7.3 hereof. Landlord and Tenant
acknowledge that the projected Floor Area of the Premises shall be
approximately 100,000 square feet.
2. Term.
<PAGE> 6
2.1 Commencement. This Lease constitutes a binding agreement and the
obligations of Landlord and Tenant hereunder shall be effective upon
execution and delivery of this Lease by both Landlord and Tenant.
However, the initial term ("INITIAL TERM") of this Lease shall commence
upon the date (the "COMMENCEMENT DATE") which is the earlier of (i) the
date upon which Tenant commences normal business operations from the
Premises (it being understood that the use of the Development as
described in Section 2.2 hereof shall not be deemed to constitute normal
business operations from the Premises by Tenant) and (ii) the date (a)
which is the later of (1) six (6) months after Landlord shall
"SUBSTANTIALLY COMPLETE" (as defined herein) the Minimum Landlord's Work
(as defined herein) and (2) twelve (12) months after the installation of
the concrete deck for the fifth (5th) floor of the Building (the
"SCHEDULED COMPLETION DATE"), the Scheduled Completion Date being
extended by any period that Tenant using reasonable diligence shall have
been unable (aa) to substantially complete the Improvements in
accordance with the Work Letter (collectively, "TENANT'S WORK") by the
Scheduled Completion Date due to Landlord Delays (as defined herein)
and/or (bb) to conduct normal business operations in the Premises as a
result of the non-completion of Landlord's Work by the Scheduled
Completion Date (subject to extension due to Tenant Delays (as defined
herein)) and (b) on which the Premises are reasonably accessible (A)
from the parking areas of the Building and the parking areas of the
Building are reasonably accessible and usable for parking purposes and
(B) by pedestrians from the Common Areas. "SUBSTANTIALLY COMPLETE" means
(as certified by Landlord's architect) complete subject to the
completion of minor punch-list type items or other minor components of
Landlord's Work or the Minimum Landlord's Work, as applicable, the
performance of which will not materially interfere with Tenant's Work to
ready the Premises for Tenant's use and occupancy thereof. Landlord
shall diligently proceed to complete said punch list items. "MINIMUM
LANDLORD'S WORK" means Landlord's Work as describe in the Work Letter
exclusive of base building systems, mechanical systems and operational
elevators. If Landlord shall be delayed in substantially completing
Landlord's Work, the Minimum Landlord's Work and/or the Common Areas and
such delay shall be caused by or shall arise out of or in connection
with any of the following (each a "TENANT DELAY"):
(1) Tenant's direction that Landlord delay in proceeding
with any segment or part of Landlord's Work, the Minimum
Landlord's Work and/or the Common Areas (except under
circumstances where the basis for such direction is the fact
that Landlord must rectify an error in Landlord's Work, the
Minimum Landlord's Work and/or the Common Areas that is not
otherwise attributable to Tenant); or
(2) the performance of work by any person, or entity
employed or hired by Tenant or on behalf of Tenant that actually
delays Landlord in the completion of Landlord's Work, the
Minimum Landlord's Work and/or the Common Areas, provided that
if Landlord shall be aware of any such delay, Landlord shall
immediately notify Tenant thereof and Tenant fails to remedy any
such delay by the end of the second (2nd) day following receipt
of Landlord's notice of any such delay; or
<PAGE> 7
(3) any acts or omissions of Tenant, or of any Affiliate
(as defined herein) of Tenant that actually delays Landlord in
the completion of Landlord's Work, provided that if Landlord
shall be aware of any such delay, Landlord shall immediately
notify Tenant thereof and Tenant fails to remedy any such delay
by the end of the second (2nd) day following receipt of
Landlord's notice of any such delay; or
(4) Tenant's unreasonable delay or refusal in making
changes to the Work Letter reasonably requested by Landlord; or
(5) any breach of any of the terms of this Lease by
Tenant that actually delays Landlord in substantially completing
Landlord's Work, the Minimum Landlord's Work and/or the Common
Areas, provided that if Landlord shall be aware of any such
delay, Landlord shall immediately notify Tenant thereof and
Tenant fails to remedy any such delay by the end of the second
(2nd) day following receipt of Landlord's notice of any such
delay; or
(6) any unreasonable failure on Tenant's part to
cooperate with Landlord in connection with Landlord's
performance of Landlord's Work, the Minimum Landlord's Work
and/or the Common Areas;
then notwithstanding anything in this Lease to the contrary, Landlord's
Work and/or the Minimum Landlord's Work shall be deemed to be
Substantially Complete as of the date that substantial completion would
have occurred but for such delay and the Common Areas shall be deemed to
be accessible and reasonably usable as of the date that the Common Areas
would have been accessible and reasonably usable but for such delay, as
applicable.
If Tenant desires a change in the Work Letter or Tenant requests for any
materials, finishes or installation not originally contemplated by this
Lease or contained in the Work Letter, Tenant shall submit to Landlord
the proposed change or request (herein called a "TENANT REVISION"). A
Tenant Revision shall be subject to Landlord's approval, which approval
shall not be unreasonably withheld or delayed, and, if so approved,
Landlord shall cause to be prepared and shall submit to Tenant for its
approval or disapproval, an estimate of the delays in performance of
Landlord's Work resulting from Tenant's request for a Tenant Revision
and an estimate of the incremental increased cost to Landlord to
complete Landlord's Work as a result of such Tenant Revision, as
reasonably determined by Landlord. Tenant shall approve or disapprove
the estimate within five (5) days after receipt of such estimate. In the
event Tenant shall approve any such estimate, any delays resulting from
a Tenant Revision shall be deemed a Tenant Delay and Tenant shall be
solely responsible for any increased cost to complete Landlord's Work
resulting from a Tenant Revision and all such costs shall be paid by
Tenant to Landlord within thirty (30) days after rendition of a bill
therefor. If Tenant shall fail to respond within such five (5) day
period, then a Tenant Revision shall be deemed withdrawn.
Notwithstanding Tenant's approval or disapproval of Landlord's estimate
with respect to a Tenant
<PAGE> 8
Revision, Tenant shall be responsible for all professional fees
associated with Landlord's review of a Tenant Revision and the
preparation of Landlord's estimate(s) and revised construction documents
in connection therewith.
For all purposes hereof, "LANDLORD DELAY" means the delay in the
Substantial Completion of Tenant's Work to be the extent caused by or
arising out of or in connection with any of the following:
(i) Landlord's direction that Tenant delay in proceeding
with any segment or part of Tenant's Work (except under
circumstances where the basis for such direction is the fact
that Tenant must rectify an error in Tenant's Work that is not
otherwise attributable to Landlord); or
(ii) the performance of work by any person, or entity
employed or hired by Landlord or on behalf of Landlord that
actually delays Tenant in the completion of Tenant's Work,
provided that if Tenant shall be aware of any such delay, Tenant
shall immediately notify Landlord thereof and Landlord fails to
remedy any such delay by the end of the second (2nd) day
following receipt of Tenant's notice of any such delay; or
(iii) any acts or omissions of Landlord or of any
Affiliate of Landlord that actually delay Tenant in the
completion of Tenant's Work (except in connection with the
exercise of any of Landlord's rights expressly set forth in this
Lease and/or the Work Letter), provided that if Tenant shall be
aware of any such delay, Tenant shall immediately notify
Landlord thereof and Landlord fails to remedy any such delay by
the end of the second (2nd) day following receipt of Tenant's
notice of any such delay; or
(iv) any breach of any of the terms of this Lease by
Landlord, including, without limitation, the funding of the
Allowance subject to and in accordance with the terms and
conditions of this Lease, that actually delays Tenant in
substantially completing Tenant's Work provided that if Tenant
shall be aware of any such delay, Tenant shall immediately
notify Landlord thereof and Landlord fails to remedy any such
delay by the end of the second (2nd) day following receipt of
Tenant's notice of any such delay; or
(v) the non-completion of Landlord's Work as of the date
on which the concrete deck for the fifth (5th) floor of the
Building is installed and Tenant commences the performance of
Tenant's Work if and to the extent any such delay would not have
occurred had Landlord's Work been Substantially Completed as of
such date and Tenant has endeavored, in good faith, to use good
construction practice, but at no additional cost to Tenant, to
complete Tenant's Work as expeditiously as reasonably possible
under the circumstances and notwithstanding such non-completion
of Landlord's Work as of the date on which the concrete deck for
the fifth (5th) floor of the Building is installed, provided
that if Tenant
<PAGE> 9
shall be aware of any such delay, Tenant shall immediately
notify Landlord thereof.
Without limiting any provisions of this Lease, any dispute between the
parties as to whether a Tenant Delay or Landlord Delay has occurred or
the amount of such delay shall be subject to arbitration pursuant to
Section 7.3 hereof.
The parties shall execute an acknowledgment that Landlord's Work and/or
the Minimum Landlord's Work has been completed (or deemed to be
completed) and that the Common Areas are accessible and reasonably
usable (or deemed to be accessible and reasonably usable) and that the
Commencement Date has occurred, as soon as reasonably practicable
thereafter. Neither Landlord's failure to request, nor Tenant's failure
to execute, such agreement shall affect the Commencement Date. Landlord
shall provide Tenant (i) notice not less than one hundred twenty (120)
days prior to the date that Landlord anticipates Landlord shall
Substantially Complete Landlord's Work ("LANDLORD'S FIRST SUBSTANTIAL
COMPLETION ESTIMATE NOTICE") and (ii) a second notice to Tenant
("LANDLORD'S SECOND SUBSTANTIAL COMPLETION ESTIMATE NOTICE") not less
than thirty (30) days prior to the date that Landlord anticipates
Landlord shall Substantially Complete Landlord's Work, in each case
without taking into account any acceleration of the date Landlord's Work
shall be deemed to have been Substantially Complete as a result of one
or more Tenant Delays. The Initial Term shall terminate on the twentieth
(20th) anniversary of the Commencement Date. Reference in this Lease to
"LEASE YEAR" shall mean each successive twelve (12) month period during
the Term (as defined herein) commencing on January 1 and ending December
31 (or such other twelve (12) month period as shall be reasonably
designated by Landlord), provided that the first Lease Year shall begin
upon the Commencement Date and end on December 31 of the calendar year
in which the Commencement Date occurs, and the last Lease Year shall end
on the last day of the Initial Term or the last day of the last
exercised Option Period (as defined herein) hereunder. "TERM" as used
herein shall mean the Initial Term and all validly exercised Option
Periods.
2.2 Access Prior to Commencement Date. Until the earlier of (i) the
Commencement Date and (ii) the date on which a termination notice is
served by either Landlord or Tenant pursuant to Section 54 hereof, and
subject to all applicable laws and ordinances, Tenant shall be entitled
to maintain an office either within the Development or at a location
suitable therefor reasonably acceptable to Landlord and Tenant, or, at
Landlord's election, on the surface parking area (if any) adjacent to
said Development, all at no cost to Tenant for Monthly Base Rent, Common
Area Expenses or real property taxes (as such terms are defined herein),
for its pre-opening and construction period activity. Tenant shall be
entitled to hang a banner or other signage in the Development, subject
to compliance with applicable laws, regulations, permits, approvals,
ordinances, the Condominium Documents (if applicable) and the CC&R and
subject to Landlord's prior approval of all Signage Approval Factors (as
defined herein). Such office shall be deemed to constitute a part of the
Premises for all purposes (including, without limitation, Article 19
hereof (Indemnification) and Article 20 hereof (Insurance) and Tenant's
obligation to pay for utilities), but Tenant shall not be required to
pay Monthly Base
<PAGE> 10
Rent, Common Area Expenses or real property taxes with respect thereto.
If Landlord makes available the surface parking area for the purpose of
such temporary office, it shall be Tenant's obligation, at its sole
cost, to provide a trailer for Tenant's use on such parking area and to
pay all costs and expenses and bear all liabilities associated
therewith.
3. Options to Extend.
Landlord hereby grants to Tenant three (3) successive options (each an
"OPTION" and collectively, the "OPTIONS") to extend the term of this Lease, each
for a one hundred sixty-eight (168) month period (each an "OPTION PERIOD" and,
collectively, the "OPTION PERIODS"), upon the same terms and conditions as those
set forth in this Lease for the Initial Term (except that no options to extend
other than the Options are granted). In order to exercise an Option, Tenant must
give notice to Landlord of its intention to exercise the applicable Option on or
before the date (the "OPTION DATE") which is six (6) months prior to the end of
the Initial Term or the previous Option Period, as applicable; provided,
however, that it shall be a condition precedent to the exercise of each Option
that Tenant shall not be in Default as of the respective Option Date. Tenant's
election not to exercise an Option, or the passage of an Option Date without
exercise of the subject Option, shall thereby terminate the subsequent Option or
Options. The Options are personal to Tenant and may not be assigned except in
connection with a permitted assignment of Tenant's interest in this Lease.
Landlord shall deliver to Tenant a notice reminding Tenant of Tenant's right to
exercise an Option not more than six (6) months and not less than thirty (30)
days prior to the date Tenant may first exercise an Option, provided that in no
event shall Landlord's failure to deliver such notice impose any liability on
Landlord's part; however if Landlord fails to deliver such notice the time for
Tenant's exercise of an Option shall be extended, if necessary, to the date
which is thirty (30) days from the date of delivery of such notice from
Landlord.
4. Membership.
Tenant agrees to provide both daily passes and membership on the
following terms and conditions set forth in this Article 4. In addition, all
Club daily passes and memberships shall be subject to the nondiscriminatory
rules and regulations promulgated by Tenant for use of the Club.
4.1 Hotel Guests. Tenant shall permit room guests of the to-be constructed
hotel in the Development, currently contemplated to be operated as a
Rosewood Hotel (such hotel (which, for purposes of this Lease, shall
include any extended stay or time share facilities operated in
connection therewith or otherwise by Landlord, the operator thereof or a
successor or assign of either), the "PRIMARY HOTEL", and such room
guests of such hotel (including such extended stay component), the
"PRIMARY HOTEL GUESTS"), to have access to the Club to use the
facilities therein at such times as the Club is open for business in
consideration for a daily fee payment not to exceed seventy-five percent
(75%) of the then applicable daily fee payment for room guests of other
hotels (other than the Primary Hotel) to have access to the Club to use
the facilities therein or a monthly fee payment pursuant to a separate
written agreement between the owner of the Primary Hotel and Tenant (the
"ATHLETIC CLUB FEE"), a copy of which Tenant shall promptly deliver to
<PAGE> 11
Landlord.The operator of the Primary Hotel shall pay the Athletic Club
Fee to Tenant on a monthly basis as provided in this Section 4.1. Tenant
shall issue the operator of the Primary Hotel a bill for each monthly
Athletic Club Fee ("PRIMARY HOTEL BILL") payable on the later to occur
of the tenth (10th) day of each calendar month and the tenth (10th) day
following the receipt of the Primary Hotel Bill by the Primary Hotel. If
the operator of the Primary Hotel does not pay in full the Primary Hotel
Bill within thirty (30) days from its receipt of the Primary Hotel Bill,
then, in such event, Tenant may deliver a termination notice to the
operator of the Primary Hotel terminating the right of the Primary Hotel
and Primary Hotel Guests to use the Club until payment in full of all
amounts due. Such termination notice shall be delivered by Tenant and be
effective five (5) days following delivery of such notice to the
operator of the Primary Hotel. In the event the Primary Hotel shall fail
to perform any of the terms and conditions contained in this Section 4.1
on its part to be performed, Landlord shall be under no obligation or
liability whatsoever to Tenant; provided, however, that until such time
as Tenant and the Primary Hotel shall have entered into an agreement
with respect to this Section 4.1 (the "ATHLETIC CLUB AGREEMENT"), a copy
of which Tenant shall promptly deliver to Landlord, (a) Landlord shall
reasonably cooperate with Tenant in seeking to obtain the performance of
the Primary Hotel with respect to such applicable terms and conditions
of this Section 4.1 and (b) so long as Landlord or an Affiliate (as
defined herein) of Landlord is the owner of the Primary Hotel, Landlord
shall pay to Tenant the portion(s) of any Primary Hotel Bill which the
operator of the Primary Hotel does not pay to Tenant in full in
accordance with this Section 4.1 within thirty (30) days after
Landlord's receipt of the applicable Primary Hotel Bill and a statement
describing in reasonable detail the portion(s) thereof which remain due.
Without limiting any provisions of this Lease, any dispute between
Landlord and Tenant as to any Primary Hotel Bill shall be subject to
arbitration pursuant to Section 7.3 hereof. For purposes of this Section
4.1, "AFFILIATE" shall mean a Person (as defined herein) which shall (1)
control (as defined herein), (2) be under the control of, or (3) be
under common control with the Person in question.
4.2 Performance by Primary Hotel. If the Primary Hotel shall default in any
of the Primary Hotel's obligations under Section 4.1 hereof, or there
shall exist a bona fide dispute with the Primary Hotel under Section 4.1
hereof and Tenant notifies Landlord in writing that Tenant has
previously notified the Primary Hotel of such dispute and that such
default or notice has been disregarded or not reasonably satisfactorily
acted upon, then upon Tenant's request and provided Tenant is not in
default under this Lease, Landlord shall use reasonable efforts to
enforce Landlord's rights under the hotel management agreement with the
Primary Hotel (the "HOTEL MANAGEMENT AGREEMENT") for Tenant's benefit,
including, without limitation, giving notices, claims and demands to and
on the Primary Hotel. Tenant shall reimburse Landlord for all costs
incurred in connection with the enforcement of such rights.
Notwithstanding the foregoing, Landlord shall have no obligation to
commence any action at law or in equity to obtain any relief sought by
Tenant by reason of the Primary Hotel's breach of the Primary Hotel's
obligations under Section 4.1 hereof. If, after request from Tenant,
Landlord shall fail or refuse to take appropriate action for the
enforcement of Landlord's rights against the Primary Hotel with respect
to Section 4.1 hereof, Tenant shall have the right to take such action
in
<PAGE> 12
Tenant's own name, and for such purpose and only to such extent, all of
the rights of Landlord under the Hotel Management Agreement are hereby
conferred upon and conditionally assigned to Tenant and Tenant hereby is
subrogated to such rights to the extent that the same shall apply to
Section 4.1 hereof; provided, however, that (i) Tenant shall only have
such rights if Tenant shall not be in default under this Lease and (ii)
Landlord shall have the right to require Tenant to discontinue such
action if in the reasonable opinion of Landlord such action may cause a
default, cancellation, forfeiture or termination of the Hotel Management
Agreement or any Senior Interest. If any such action against the Primary
Hotel in Tenant's name shall be barred by reason of lack of privity,
non-assignability or otherwise, Tenant may take such action in
Landlord's name provided Tenant has obtained the prior consent of
Landlord, and that copies of all papers and notices of all proceedings
shall be promptly given to Landlord so that Landlord may be kept fully
informed in respect thereof.
4.3 Residential Occupants. Tenant agrees that all applications for
membership in the Club submitted by the residential occupants and their
families at the Development shall be automatically and promptly accepted
provided that each such individual shall observe the rules and
regulations reasonably promulgated by Tenant from time to time with
respect to the use of the Club which rules and regulations shall be
consistent with the rules and regulations customarily promulgated by
operators of first-class coed athletic clubs and shall not be enforced
in a discriminatory manner.
4.4 Other Occupants. Subject to availability, Tenant agrees that all
applications for membership in the Club submitted by employees or
principals of any of the tenants in the Development shall be
automatically and promptly accepted provided that each such individual
shall observe the rules and regulations reasonably promulgated by Tenant
from time to time with respect to the use of the Club which rules and
regulations shall be consistent with the rules and regulations
customarily promulgated by operators of first-class coed athletic clubs
and shall not be enforced in a discriminatory manner.
5. Rent.
Rent shall be calculated and payable as follows:
5.1 Annual Base Rent. During the Initial Term Tenant agrees to pay Landlord
annual base rent for the Premises (the "ANNUAL BASE RENT") at the rate
of Two Million Seven Hundred Fifty Thousand and 00/100 Dollars
($2,750,000.00) per annum (the "INITIAL ANNUAL BASE RENT AMOUNT"). In
addition to Annual Base Rent, Tenant agrees to pay as "ADDITIONAL RENT"
(sometimes referred to as "ADDITIONAL RENT") all other charges payable
by Tenant pursuant to the terms of this Lease. Annual Base Rent together
with all such additional rent is collectively referred to herein as
"RENT". Tenant shall pay Annual Base Rent and, except as provided
otherwise herein, Additional Rent, in equal monthly installments on the
first day of each month (each such equal monthly installment of Annual
Base Rent is referred to herein as "MONTHLY BASE RENT"). If for any
reason the Initial Term (or any Option Period) commences or ends on a
day other than the first day of a calendar month (other than a
termination resulting from a Default), then Rent for
<PAGE> 13
the first month and for the last month of the Term shall be prorated in
the proportion that the number of days during the first and last months
of the Term bears to the actual number of days in such months. All Rent
shall be paid to Landlord, without prior demand or notice, in lawful
money of the United States of America, at such place as Landlord may
from time to time reasonably designate in writing and shall be due and
payable on the first day of each month. Rent shall be paid to Landlord
on the date due without notice or demand, and without abatement,
deduction or set-off except as otherwise expressly set forth in this
Lease. No payment by Tenant or receipt by Landlord of a lesser amount
than the Annual Base Rent or Additional Rent, nor shall any endorsement
or statement on any check or in any letter accompanying any check or
payment, as Annual Base Rent or Additional Rent, be deemed an accord and
satisfaction, and Landlord may accept such check or payment without
prejudice to Landlord's right to recover the balance of such Annual Base
Rent and Additional Rent or pursue any other remedy provided in this
Lease or by law.
6. Club Name.
Tenant shall be entitled to operate the Club under the name "The Sports
Club/Boston," although Tenant has no obligation to use such name. Tenant shall
not use the name "Millennium" or the name of the Primary Hotel in the operating
name of the Club. If Tenant shall not operate the Club under the operating name
"The Sports Club/Boston" or under an operating name which incorporates the
phrase "Sports Club/LA" in conjunction with a geographic designation with
respect to the city in which the Club is located or such other operating name to
which a substantial number of then existing comparable athletic club facilities
operated by Tenant and affiliates of Tenant are being operated under, the
operating name of the Club shall be subject to the prior approval of Landlord,
which approval shall not be unreasonably withheld or delayed.
7. Common Area Expenses/Operating Expenses.
7.1 Definition. Commencing upon the Commencement Date, Tenant shall pay, in
addition to Monthly Base Rent, all assessments and charges which are
assessed against or incurred in connection with the Premises and/or the
Common Areas, all assessments and charges which are assessed against or
incurred in connection with the CC&R which are reasonably allocable to
the Premises and/or the Common Areas and all charges assessed with
respect to the Premises by the Condominium Association (collectively,
"COMMON AREA EXPENSES"). If at any time during the Term the Premises
shall not be subject to a condominium form of ownership, then in lieu of
paying charges assessed by the Condominium Association, Tenant shall pay
to Landlord Tenant's Share (as defined herein) of Operating Expenses (as
defined herein). "OPERATING EXPENSES" shall mean all costs incurred by
Landlord (except as hereafter defined) in connection with the operation
of the Development for each successive twelve (12) month period (as
designated by Landlord) occurring in whole or in part during the Term
(and any renewals). Tenant hereby acknowledges that Operating Expenses
shall include the following costs (by way of illustration, but not
limitation): real property taxes and assessments and any taxes or
<PAGE> 14
assessments hereafter imposed in lieu thereof with respect to the
Building, including the Common Areas; water and sewer charges; dues and
fees paid to civic organizations and associations in which Landlord is a
member in the jurisdiction in which the Building is located, provided
that it is then customary for landlords of similar buildings to be
members of such organizations and associations and to charge tenants any
such dues and fees by means of operating expenses or otherwise;
accounting fees; legal fees; management fees with respect to the
Development, (not in excess of four percent (4%) of the total revenue
derived by Landlord from Landlord's operation of the Development and not
in excess of the management fees which are included as an operating
expense or otherwise in the other leases for commercial space in the
Building between Landlord and other commercial tenants of the Building);
utilities; janitorial services; parking patrol; labor; utilities
surcharges or any other costs levied, assessed or imposed by, or at the
direction of, or resulting from, statutes or regulations or
interpretations thereof, promulgated by any federal, state, regional,
municipal or local government authority in connection with the use or
occupancy of the Building, including the Common Areas; the cost in
excess of net insurance and condemnation proceeds of any capital
improvements (amortized over such period as Landlord shall determine
together with interest at the rate actually incurred by Landlord from a
third party lender on the unamortized balance) made to the Building,
including the Common Areas, but only if incurred by Landlord (i) to
comply with any governmental law, rule or regulation which may become
effective after the date of this Lease or any CC&R (other than in
connection with the initial construction of the Development by Landlord
(exclusive of Tenant's Work and/or any Tenant Revision)), or (ii) where
the present value of the projected costs of the improvement (including,
original purchase cost, installation and subsequent repairs and
replacements) is less than the present value of the amount reasonably
anticipated to be saved with respect to the applicable component(s) of
Operating Expense(s) or Common Area Expense(s), as applicable, payable
by Tenant subject to and in accordance with this Article 7 as the result
of such capital improvement over the remainder of the Initial Term or an
exercised Option Period, as applicable; supplies; materials; equipment;
tools; payroll expenses; rental of personal property used in the
maintenance and other upkeep of the Building (to the extent related to
the Premises and/or the Common Areas (e.g., those service facilities
and/or areas of the Building which are used to provide Building services
to the Premises and/or the Common Areas or used in connection with the
operation and maintenance of the Premises and/or the Common Areas)),
including the Common Areas; costs and expenses of gardening, landscaping
and irrigation; maintenance of signs; personal property taxes levied on
or attributable to personal property used in connection with the
Building (to the extent related to the Premises and/or the Common Areas
(e.g., those service facilities and/or areas of the Building which are
used to provide Building services to the Premises and/or the Common
Areas or used in connection with the operation and maintenance of the
Premises and/or the Common Areas)), including the Common Areas;
reasonable audit or verification fees in connection with this Article 7;
and costs and expenses (whether or not capitalized) of repairs,
resurfacing, maintenance, painting, lighting, cleaning, steam cleaning,
refuse removal, parking patrol, sweeping, sealcoating, restriping and
similar items to the extent includable in Operating Expenses or Common
Area Expenses, as applicable, subject to and in accordance with this
Article 7.
<PAGE> 15
Operating Expenses and Common Area Expenses, as applicable, shall not
include: depreciation of any kind, including on any buildings or parking
structures located within the Development or on any equipment;
construction costs incurred in improving or modifying space for new
tenants of the Development or renovating space vacated by any tenant;
any costs which are reimbursable by (i) tenants of the Development
(other than through their payment of Operating Expenses and/or Common
Area Expenses, as applicable), (ii) other third parties, or (iii)
proceeds of insurance; Landlord's executive salaries; real estate
brokers' commissions; or principal or interest on any indebtedness
(except as specifically permitted above).
7.2 Exclusions. In addition to the exclusions from Operating Expenses and
Common Area Expenses set forth in Section 7.1 hereof, Operating Expenses
and Common Area Expenses shall not include the following:
(1) the cost of capital expenditures except for those
specifically described in Section 7;
(2) costs incurred with respect to goods or services (including
utilities, capital improvements, maintenance and repair) supplied to the
Common Areas to the extent that such goods or services are designed for
the exclusive or primary use or benefit of another tenant or tenants
(provided that if such goods or services are for the primary use or
benefit of another tenant or tenants, the cost thereof shall be included
in Operating Expenses and Common Area Expenses, as applicable, to the
extent it is fair and equitable to do so);
(3) costs incurred to the extent that such costs are reimbursed
by insurance;
(4) any ground lease or master lease payments;
(5) legal fees incurred by Landlord in connection with (1) the
preparation, negotiation and enforcement of leases, subleases and lease
renewals, (2) the purchase or transfer or disposition of all or any part
of the Development or any interest therein and (3) any financing or
refinancing with respect to the Development;
(6) all leasing costs with respect to the Development, including
hard and soft costs of tenant improvements and preparation of any
premises, tenant concessions, advertising costs and brokerage
commissions;
(7) costs of purchasing or installing artwork or signage (it
being agreed that the cost of any such signage that identifies the
Development may be included within Common Area Expenses and Operating
Expenses, as applicable);
(8) costs of any rental or lease of equipment or capital items
that if purchased (whether outright or financed) would otherwise be
excluded from Operating Expenses or Common Area Expenses, as applicable;
<PAGE> 16
(9) costs paid to Affiliates of Landlord in excess of market
rates;
(10) fines, penalties, late payment charges, and interest
thereon, and other amounts imposed in lieu thereof, the payment of which
is attributable to Landlord's failure to act in a commercially
reasonable manner;
(11) costs to the extent arising from or relating to the
negligence or willful misconduct of Landlord or Landlord's agents,
principals, employees, licensees or Affiliates;
(12) Landlord's general overhead and general administrative
expenses;
(13) costs for repair or maintenance covered by warranties or
service contracts (however, the costs of the warranties or service
contracts shall be includable in Common Area Expenses and Operating
Expenses, as applicable);
(14) expenditures required by Landlord's failure to comply with
laws, regulations or orders, which are required to be complied with by
Landlord under this Lease (except to the extent expressly permitted in
Section 7.1 hereof);
(15) costs to repair latent or patent defects with respect to
the Development or Landlord's Work;
(16) costs incurred due to the violation by Landlord or any
other occupant of the Development of the terms or conditions of any
lease;
(17) costs arising from or relating to the presence of Hazardous
Materials (as defined herein) in or about the Development;
(18) any costs associated with the initial construction of the
Development and failure by Landlord to construct the Development in
accordance with applicable legal requirements as of the date Landlord
shall Substantially Complete Landlord's Work (exclusive of any such
costs arising out of Tenant's Work and/or any Tenant Revision);
(19) insurance premiums, but only if and to the extent Landlord
is reimbursed for the cost thereof by Landlord's insurers;
(20) bad debt expenses resulting from Landlord's negligence or
improper acts;
(21) costs of charitable or political contributions and fees and
dues paid to trade associations (other than as provided in Section 7.1
hereof);
(22) any cost payable by Tenant pursuant to other Sections of
this Lease; and
<PAGE> 17
(23) any Operating Expenses or Common Area Expenses, as
applicable, reasonably allocable to any parking structure located within
the Development.
7.3 Building Insurance. Except for Landlord's cost of the all-risk property
insurance for the Improvements, as addressed in Section 20.4 hereof, if
Landlord's cost of obtaining Landlord's Insurance (as defined herein)
for the Property and/or the Building and the operations thereof exceeds
the cost of obtaining such insurance for the first twelve (12) months
following the Commencement Date, Tenant shall pay to Landlord, in a
manner similar to this Section 7.3 within thirty (30) days after being
billed therefore, an amount equal to Tenant's Share of such increased
cost.
"TENANT'S SHARE" shall mean a percentage equal to the quotient obtained
by dividing the Floor Area of the Premises (subject to Section 7.6
hereof) by the total number of square feet of Floor Area in the other
tenantable portions of the Development as of the date of the Actual
Statement (as defined herein) for the applicable Lease Year. Landlord
and Tenant acknowledge that at this time it is not possible to determine
the equitable allocation of all components of Operating Expenses or
Common Area Expenses, as applicable. Accordingly, Landlord shall use
commercially reasonable efforts from time to time (i) to equitably
adjust Tenant's Share of some or all of the components of Operating
Expenses to a percentage other than that which would be arrived at by
the methodology hereinbefore described for the determination of Tenant's
Share, so as to ensure that (a) Tenant will pay Tenant's equitable share
of Operating Expenses and (b) if and to the extent applicable and the
same shall not result in an increase in the payment of Common Area
Expenses or Operating Expenses, as applicable, by Tenant in accordance
with this Article 7, the methodology employed by Landlord to determine
Tenant's equitable share of Operating Expenses is substantially
consistent with the methodology employed in connection with that certain
lease between an Affiliate of Landlord, as landlord and an Affiliate of
Tenant, as tenant, for certain space in New York, New York (the "NEW
YORK ATHLETIC CLUB LEASE") for calendar years 1996 and 1997 or (ii) to
equitably adjust some or all of the components of Common Area Expenses,
so as to ensure that Tenant will pay Common Area Expenses in accordance
with the methodology hereinbefore described in Section 7.1 hereof and,
if and to the extent applicable and the same shall not result in an
increase in the payment of Common Area Expenses or Operating Expenses,
as applicable, by Tenant in accordance with this Article 7, the
methodology employed in connection with the New York Athletic Club Lease
for calendar years 1996 and 1997 (it being agreed and acknowledged that
in each instance in which the methodology employed in connection with
this Lease shall contradict or be inconsistent with the aforementioned
methodology employed in connection with the New York Athletic Club
Lease, such aforementioned methodology employed in connection with the
New York Athletic Club Lease shall prevail and govern if and to the
extent applicable and such employment shall not result in an increase in
the payment of Common Area Expenses or Operating Expenses, as
applicable, by Tenant in accordance with this Article 7.) In the event
Tenant shall dispute Landlord's determination as to the equitable
allocation of any component of Operating Expenses or Common Area
<PAGE> 18
Expenses, as applicable, and if Landlord and Tenant shall have been
unable to resolve such dispute, within thirty (30) days following the
date that Tenant shall have notified Landlord of such dispute, then,
provided that Tenant shall pay all such amounts as billed by Landlord on
or before the due dates for payment, Tenant may submit such dispute to
binding arbitration in accordance with the Commercial Arbitration Rules
of the AAA and the following provisions hereof within ten (10) days next
following the giving of any notice by Tenant to Landlord stating that it
wishes such dispute to be determined by arbitration. Landlord and Tenant
shall each give notice to the other setting forth the name and address
of an arbitrator designated by the party giving such notice within ten
(10) days after Landlord's receipt of Tenant's arbitration notice. If
either party shall fail to give notice of such designation within said
ten (10) days, then the arbitrator to be chosen by such party shall be
chosen in the same manner as hereinafter provided for the appointment of
the third arbitrator in the case where the two arbitrators chosen
hereunder are unable to agree upon such appointment. The two arbitrators
shall designate a third arbitrator. If the two arbitrators shall fail to
agree upon the designation of a third arbitrator within ten (10) days
after the designation of the second arbitrator, then either party may
apply to the American Arbitration Association or any successor
organization thereto ("AAA") for the designation of such arbitrator;
provided, however, nothing contained herein shall be construed to
require submission of any dispute to the AAA. All arbitrators shall be
persons who shall have had at least ten (10) years experience in the
business of operating or managing commercial real estate in Boston,
Massachusetts and shall not be affiliated with either Landlord or
Tenant. The three arbitrators shall conduct such hearings as they deem
appropriate in accordance with the Commercial Arbitration Rules of the
AAA, making their determination in writing and giving notice to Landlord
and Tenant of their determination within ten (10) days, if at all
possible, after the designation of the third arbitrator; the concurrence
of any two of said arbitrators shall be binding upon Landlord and
Tenant. Any award of the arbitrators shall be limited to the
determination as to whether Landlord made an equitable allocation of the
component(s) of Operating Expenses or Common Area Expenses, as
applicable which are the subject of such dispute. If it is determined
that Landlord has not equitably allocated a component(s) of Operating
Expenses or Common Area Expenses, as applicable, then the arbitrators
shall determine the equitable allocation thereof. The determination in
any arbitration held pursuant to this Section 7.3 shall be final and
binding upon Landlord and Tenant. Each party shall pay its own counsel
fees and expenses, if any, in connection with any arbitration under this
Section 7.3, and each party shall pay the fees and expenses of the one
of the two (2) original arbitrators appointed by or for such party and
the fees and expenses of the third arbitrator shall be shared by the
parties equally; it being agreed that (1) if it shall be determined in
the arbitration that Landlord has not equitably allocated a component(s)
of Operating Expenses or Common Area Expenses, as applicable, and as a
result thereof Tenant shall have made an overpayment of Operating
Expenses or Common Area Expenses, as applicable, by more than five
percent (5%), then, Landlord shall pay the reasonable actual
out-of-pocket cost of the arbitration proceeding incurred by Tenant not
to exceed $7,500.00, and the amount of any such overpayment shall be
credited against the next installment (or installments if the credit
exceeds the amount of the next installment) of Monthly Base Rent due
under this Lease and if the amount of the
<PAGE> 19
credit exceeds the amount of the subsequent installment(s) of Monthly
Base Rent due under this Lease, the excess shall be refunded to Tenant
within thirty (30) days after the aforementioned arbitration
determination with interest thereon at the Prime Rate (as defined
herein) from the date of such overpayment, and (2) if it shall be
determined in the arbitration that Landlord has equitably allocated the
components of Operating Expenses or Common Area Expenses, as
applicable, then, Tenant shall pay the reasonable actual out-of-pocket
cost of the arbitration proceeding incurred by Landlord not to exceed
$7,500.00 and if it shall be determined in the arbitration that Tenant
shall have made an underpayment of Operating Expenses or Common Area
Expenses, as applicable, Tenant shall pay to Landlord the amount of any
such underpayment within thirty (30) days after the aforementioned
arbitration determination with interest thereon at the Prime Rate from
the date of such underpayment.
7.4 Statements. As soon as possible after the beginning of the Initial Term,
Landlord shall give to Tenant a statement estimating the Common Area
Expenses or Operating Expenses, as applicable for the first Lease Year.
Thereafter, Landlord shall give Tenant, prior to the expiration of each
Lease Year, a statement estimating the Common Area Expenses or Operating
Expenses, as applicable for the following Lease Year. The estimated
Common Area Expenses or Operating Expenses, as applicable, shall be the
applicable estimated amounts described in this Section 7. The estimated
Common Area Expenses or Operating Expenses, as applicable, shall be
divided into twelve (12) equal monthly installments (or, as to the first
and last Lease Year, divided by the number of calendar months in such
Lease Year), and Tenant shall pay to Landlord Tenant's monthly
installment of such Common Area Expenses or Operating Expenses, as
applicable, on the first day of each month during the Term as additional
rent. If, in any Lease Year, the actual Common Area Expenses or
Operating Expenses, as applicable, are less than the estimated payments
made by Tenant for such Lease Year, as evidenced in Landlord's statement
(the "ACTUAL STATEMENT") of actual Common Area Expenses or Operating
Expenses, as applicable, for such Lease Year (which Landlord shall
deliver to Tenant within ninety (90) days after the expiration of each
Lease Year), then any overpayment made by Tenant on the monthly
installment basis shall be credited towards the next monthly
installment(s) falling due and the estimated monthly installments of
Common Area Expenses or Operating Expenses, as applicable, shall be
adjusted to reflect such lower amounts. Similarly, if, in any Lease
Year, the actual Common Area Expenses or Operating Expenses, as
applicable, are greater than the estimated payments made by Tenant for
such Lease Year as evidenced in the Actual Statement for such Lease
Year, then Tenant shall pay the amount of such difference to Landlord
within thirty (30) days after invoice; provided, however, that if the
amount due exceeds 1/2 of Monthly Base Rent then in effect, Tenant may
pay such amount in thirty (30) day installments with each installment in
the amount of the lesser of the remainder due or 1/2 of the Monthly Base
Rent then in effect. Notwithstanding that the Term may have terminated
or expired and Tenant has vacated the Premises, when the final
determination is made of the actual Common Area Expenses or Operating
Expenses, as applicable, for the last Lease Year, Tenant shall
immediately pay to Landlord any increase due over the estimated Common
Area Expenses or Operating Expenses, as applicable, paid by Tenant and,
conversely, any
<PAGE> 20
overpayment made in the event actual Common Area Expenses or Operating
Expenses, as applicable, decrease, shall be rebated by Landlord to
Tenant within thirty (30) days after such determination. The foregoing
provision shall survive the expiration or earlier termination of this
Lease.
7.5 Audit. Upon prior notice, but not more frequently than once each Lease
Year, Tenant shall have the right to examine Landlord's books and
records with regard to Common Area Expenses or Operating Expenses, as
applicable, during normal business hours. If Tenant disputes the amount
of Common Area Expenses or Operating Expenses, as applicable, set forth
in any Actual Statement delivered by Landlord or otherwise paid by
Tenant, Tenant must notify Landlord of such dispute in writing within
three (3) months following Tenant's receipt of the Actual Statement.
Tenant's failure to notify Landlord of a dispute within said three (3)
month period shall be deemed Tenant's acceptance and approval of the
accuracy of the Actual Statement. Provided Tenant has timely given the
required dispute notice and has paid the amounts claimed to be due under
the Actual Statement (including the disputed amount), Tenant shall have
the right, to be exercised, if at all, not later than three (3) months
after the date Tenant gave the dispute notice, to cause Landlord's books
and records with respect to the relevant Lease Year to be audited by a
certified public accountant, or by another Tenant representative
mutually acceptable to Landlord and Tenant. The amounts payable under
Section 7.4 hereof by Landlord to Tenant or by Tenant to Landlord, as
the case may, be shall be appropriately adjusted on the basis of such
audit. If such audit discloses a liability for further refund by
Landlord to Tenant in excess of five percent (5%) of the Common Area
Expense payments or Operating Expense payments, as applicable,
previously made by Tenant for such Lease Year, Landlord shall pay for
the reasonable cost of the audit not to exceed $7,500.00; otherwise,
Tenant shall pay for the cost of the audit. Notwithstanding the
foregoing, if any audit conducted by Tenant discloses that Landlord
over-reported Common Area Expenses or Operating Expenses by more than
five percent (5%) for the period covered by the audit, then Tenant shall
be entitled to audit Common Area Expenses or Operating Expenses, as
applicable, for all preceding years as to which records are available.
Landlord shall be obligated to maintain said records for sixty (60)
months (but for no such longer period of time) after the end of each
Lease Year except if a dispute with respect thereto is then pending
under Section 7.3 hereof.
7.6 Notwithstanding anything to the contrary contained herein, if in any
Lease Year during which Tenant shall be paying Operating Expenses the
total Floor Area of buildings in the Development which are tenantable is
not fully occupied, then the Operating Expenses for such Lease Year
shall be deemed to be an amount that would be incurred if such total
Floor Area were occupied for such Lease Year, but in no event shall
Tenant be required to pay more than ninety-five percent (95%) of the
actual Operating Expenses.
7.7 Cost Abatement
Provided that Tenant shall not then be in default of any of Tenant's
obligations under this Lease (following notice thereof), Tenant shall be
entitled to an aggregate credit of
<PAGE> 21
$833,333.33 to be applied against (i) the monthly installments of Common Area
Expenses or Operating Expenses, as applicable, payable by Tenant in accordance
with this Section 7, (ii) the installments of Taxes (as hereinafter defined)
payable in accordance with Section 12 hereof and (iii) the sums payable by
Tenant in accordance with Section 36 hereof for use of parking spaces located at
the Development.
8. Use.
8.1 Permitted Use. Subject to the terms and provisions of Section 8.2
hereof, the Premises shall be used exclusively for a first-class coed
athletic club operated by an operator with first-class expertise,
reputation and experience, and Tenant shall not use or permit the
Premises to be used for any other purpose, or by an operator other than
Tenant or an Affiliate of Tenant, without the prior consent of Landlord,
which may be withheld in the sole and absolute discretion of Landlord.
As used herein, "FIRST-CLASS" shall mean comparable to other athletic
clubs with comparable facilities operated by Tenant or Tenant's
Affiliates as of the date hereof. As a part of the athletic club
operated from the Premises, but subject to the terms and provisions of
Section 8.2 hereof, Tenant shall be entitled to use portions of the
Premises for uses complementary to an athletic club (but only in support
of Tenant's primary operation as an athletic club), such as a pro shop,
child care facility, delicatessen, so long as the type and quality of
such complementary uses are consistent with the services offered in
other first-class athletic clubs; provided, however, no food or
beverages (other than primarily for consumption at the Premises) shall
be sold from the Premises. Any complementary uses may be achieved
through a license, which license shall (i) be subject to all terms and
conditions of this Lease but shall not otherwise require Landlord's
prior approval and (ii) other than with respect to the complimentary
uses in the Reebok Sports Club/New York as of the date hereof, not
conflict with an exclusive use granted by Landlord to any then current
tenant or any future tenant or occupant of the Development of which
Landlord has advised Tenant.
8.2 Compliance with Laws.
(1) Tenant shall not use or occupy the Premises in violation of
(a) law or the certificate of occupancy issued for the Improvements or
the Building, (b) any condominium master deed or declaration of trust,
offering plan, by-laws, house rules, and other requirements, instruments
or declarations (collectively the "CONDOMINIUM DOCUMENTS") now or
hereafter ratified by any condominium association or equivalent or the
trustees of any condominium association (collectively, the "CONDOMINIUM
ASSOCIATION") having jurisdiction over the Premises, (c) any private
covenants, conditions or restrictions or reciprocal easement agreements
(collectively, the "CC&R") which may now or hereafter be recorded
encumbering the Development or (d) any liquor license issued with
respect to the Club, and shall, upon notice from Landlord, discontinue
any use of the Premises which is in violation of law or of said
certificate of occupancy, or is a violation of the Condominium
Documents, the CC&R or said liquor license. Notwithstanding the
foregoing, after the date hereof Landlord shall not amend or modify any
existing CC&R or create new CC&R's or Condominium Documents which
materially adversely affect any of Tenant's rights hereunder or
materially increase its
<PAGE> 22
obligations hereunder (individually and collectively, a "CONSENT
REQUIRED SENIOR INTEREST") unless Tenant approves the same. If Tenant
has any objection to a Consent Required Senior Interest, Tenant shall
notify Landlord of such objection (setting forth such objection in
reasonable detail) within fifteen (15) business days after such Consent
Required Senior Interest is delivered to Tenant. If Tenant fails to
deliver a notice of objection within such period, such Consent Required
Senior Interest shall be deemed approved by Tenant.
(2) Tenant shall comply with any law or directive of any
governmental authority having jurisdiction which by reason of the nature
of Tenant's particular use or occupancy shall impose any duty upon
Tenant or Landlord with respect to the Premises or with respect to the
use or occupancy thereof.
(3) Tenant shall not do or permit to be done anything which will
increase the cost of (unless Tenant pays such increased cost) or which
will invalidate any fire, extended coverage or any other insurance
policy covering the Improvements and/or property located therein or the
Building. In the event Tenant does or permits anything to be done which
increases the cost of any insurance maintained by Landlord hereunder,
Tenant shall promptly, upon demand, as Landlord's sole remedy for such
increase (but without limiting any other remedies that may be available
to Landlord if the cause of such increase is otherwise violative of any
provisions of this Lease), reimburse Landlord for such increase. Tenant
shall not do or permit anything to be done in or about the Premises
which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Development, or use or allow the Premises to
be used for any unlawful purpose, nor shall Tenant cause, maintain or
permit any nuisance in, on or about the Premises; Landlord, however,
acknowledges that certain noise and vibration are incident to Tenant's
use of the Premises, and that to the extent the same shall not exceed
noise levels generated by other athletic clubs in similar types of
buildings and shall not otherwise exceed the legally permissible decibel
levels, the same shall not constitute a nuisance for the purposes
hereof.
(4) Tenant shall not commit or suffer to be committed any waste
in or upon the Premises.
(5) Tenant shall be responsible for obtaining, at Tenant's sole
cost and expense, all required licenses and/or permits authorizing the
use of the Premises for an athletic club and Tenant's cooking operations
with respect to the Club subject to and in accordance with this Lease
and any other use permitted under this Lease being conducted in the
Premises. Tenant shall furnish Landlord with copies of all such licenses
and permits so that Landlord may be kept fully informed in respect
thereof.
8.3 Hazardous Materials.
(1) Tenant shall not use or permit any hazardous, toxic or
radioactive materials ("HAZARDOUS MATERIALS") to be brought upon, kept
or used in or about the Premises, the Improvements or any portion of the
Development by Tenant, its agents,
<PAGE> 23
employees or contractors, unless such Hazardous Materials are necessary
or useful to and customarily used in Tenant's business and will be used,
kept and stored in a manner that complies with all laws regulating any
such Hazardous Materials. In addition, Tenant shall be entitled to use
general office supplies, normal janitorial supplies, supplies used in
maintaining its equipment and swimming pool supplies in a manner that
complies with all laws regulating their use. If Tenant breaches the
covenants and obligations set forth herein or, if the presence of
Hazardous Materials on, in or about the Premises, the Improvements or
any other portion of the Development caused or permitted by Tenant, its
agents, employees or contractors results in contamination of the
Premises, the Improvements or any other portion of the Development, then
Tenant shall indemnify, defend and hold Landlord and the owner(s) and
operator(s) of the Common Areas free and harmless from and against any
and all claims, judgments, damages, penalties, fines, costs, liabilities
and losses (including diminution in the value of the Premises and/or the
Common Areas, damages for the loss or restriction on use of rentable or
useable space or of any amenity of the Premises, the Improvements or any
other portion of the Development, and sums paid in settlement of claims,
attorneys' fees and costs, consultants' fees and expert fees) which
arise during or after the Term as a result of such contamination. This
indemnification by Tenant of Landlord and the owner(s) and operator(s)
of the Common Areas, includes any and all costs incurred in connection
with any investigation of site conditions or any clean up, remedial,
removal or restoration work required by any federal, state or local
governmental agency or political subdivision because of the presence of
such Hazardous Materials in, on or about the Premises, the Improvements
or any portion of the Development, including the soil or ground water on
or under the Development. The provisions of this Section 8.3(i) shall
survive the expiration or earlier termination of this Lease.
(2) Landlord shall not cause or permit any Hazardous Materials
to be brought upon, kept or used in or about the Premises or any other
portion of the Development by Landlord, its agents, employees or
contractors unless such Hazardous Materials are used, kept and stored in
a manner that complies with all laws regulating such Hazardous
Materials. If Landlord breaches the covenants and obligations set forth
herein or if contamination of the Premises or any other portion of the
Development by Hazardous Materials otherwise occurs which is caused by
Landlord or its agents, then Landlord shall indemnify, defend and hold
Tenant free and harmless from and against any and all claims, judgments,
damages (but not consequential damages), penalties, fines, costs and
liabilities and losses (including any diminution in the value of the
Club, and sums paid in settlement of claims, attorneys' fees and costs,
consultants' fees and expert fees) which arise during or after the Term
as a result of such contamination. This indemnification by Landlord of
Tenant includes any and all costs incurred in connection with any
investigation of site conditions or any clean up, remedial, removal or
restoration work required by any federal, state or local governmental
agency or political subdivision because of the presence of such
Hazardous Materials in or about the Premises. The provisions of this
Section 8.3(ii) shall survive the expiration or earlier termination of
this Lease.
<PAGE> 24
8.4 Restrictions.
So long as this Lease remains in full force and effect and Tenant is
operating a Club and facilities related to the operation of such Club in at
least seventy-five percent (75%) of the Premises subject to Temporary Closures
(as defined herein), Landlord hereby agrees that neither Landlord, nor any
individual(s), firm or corporation controlled by, controlling or under common
control with Landlord shall lease to, sublease to, consent to an assignment or
sublease to, operate, own or become financially interested in, (i) any other
Club within the Development, provided that an athletic club may be operated
within the Primary Hotel not to exceed 840 square feet of Floor Area in the
aggregate, or (ii) any tenant or occupant of the Development which provides spa
services or operates a beauty salon within the Development provided Tenant is
providing spa services in the Premises and/or operating a beauty salon in the
Premises (a) subject to and in accordance with this Lease and subject to
Temporary Closures (after a reasonable period of time after the Commencement
Date to prepare the Premises for same) and (b) in a manner consistent with the
typical standard of operation with respect thereto of a World Class Luxury Hotel
(as defined herein) (the "HOTEL STANDARD"). For purposes of this Lease, "WORLD
CLASS LUXURY HOTEL" means a five star luxury urban hotel in the United States as
understood in the hotel industry.
9. Notices.
All notices, requests, consents, approvals, determinations and other
communications required or permitted to be given hereunder must be in writing
and may be given only by personal delivery, overnight delivery, facsimile
transmission or by mail, and if given by mail shall be deemed sufficiently given
only if sent by registered or certified mail, return receipt requested, to the
following address of the party to receive such notice. Notices shall be deemed
received if sent in compliance with the aforesaid requirements, upon actual
receipt for notices given by personal delivery or facsimile and upon the earlier
of actual receipt or three (3) business days after deposit of any notice in the
United States mail if sent by registered or certified mail.
If to Landlord: c/o Millennium Partners
1995 Broadway, 3rd Floor
New York, New York 10023
Attention: Chief Financial Officer
Fax: (212) 579-0662
With a copy to: Battle Fowler LLP
75 East 55th Street
New York, New York 10022
Attention: Eric R. Landau, Esq.
Fax: (212) 856-7805
If to Tenant: Washington D.C. Sports Club, Inc.
11100 Santa Monica Boulevard
Suite 300
Los Angeles, California 90025
Attention: Real Estate Dept.
Fax: (310) 479-8879
<PAGE> 25
With a copy to: Resch Polster Alpert & Berger LLP
10390 Santa Monica Boulevard
Fourth Floor
Los Angeles, California 90025
Attention: Ronald M. Resch, Esq.
Fax: (310) 552-3209
Either party may specify a different address for notice purposes by
notice to the other pursuant to this Article 9.
10. Brokers.
Landlord and Tenant each warrant to the other that such party has not
had any dealings with any real estate broker or agent in connection with the
negotiation of this Lease, and that such party knows of no real estate broker or
agent who is or might be entitled to a commission in connection with this Lease.
If Landlord or Tenant has dealt with any person or real estate broker or agent
with respect to the transaction contemplated by this Lease, the party so dealing
with such person or broker or agent shall be solely responsible for the payment
of any fee due such person or broker or agent and such party shall hold the
other free and harmless from and against any liability in respect thereto,
including attorneys' fees and costs.
11. Holding Over.
If Tenant holds over after the expiration or earlier termination of this
Lease without the express consent of Landlord, Tenant shall become a tenant at
sufferance only, at a rental rate equal to one hundred twenty-five percent
(125%) of the Monthly Base Rent in effect upon the date of such expiration or
earlier termination (prorated on a daily basis), plus one hundred percent (100%)
of the other elements of Rent, and otherwise subject to the terms, covenants and
conditions herein specified, so far as applicable. Acceptance by Landlord of
Rent after such expiration or earlier termination shall not result in a renewal
of this Lease. The foregoing provisions of this Article 11 are in addition to
and do not affect Landlord's right of re-entry or any rights of Landlord
hereunder or as otherwise provided by law.
12. Taxes.
12.1 Payment. Commencing upon the Commencement Date, Tenant shall be liable
for and shall pay to Landlord, as additional rent and in the manner
hereinafter provided, all (i) real property taxes, (ii) personal
property taxes, (iii) general and special assessments, (iv) water and
sewer taxes, bonds, assessments and related charges, (v) excises,
levies, license and permit fees and (vi) all other governmental charges,
general and special, ordinary and extraordinary, of any kind and nature
whatsoever, which at any time during or applicable to the Term may be
assessed, levied, confirmed, imposed upon, or become due and payable out
of or in respect of, or become a lien on the Premises, the Improvements
or any portion thereof (collectively "TAXES"). Tenant's payment of Taxes
shall be payable by Tenant in the same number of installments as taxes
are due from Landlord to the applicable taxing authorities and shall be
due from Tenant to Landlord thirty (30) days prior to the date such
taxes, or installments thereof, are due from
<PAGE> 26
Landlord to the taxing authorities. If during the Term, Taxes are
required to be paid to the taxing authorities in full or in monthly,
quarterly or other installments, on any other date or dates than as
presently required, then, the Taxes shall be correspondingly accelerated
or revised so that same are due thirty (30) days before the date such
Taxes, or installments thereof, are due from Landlord to the taxing
authorities. Notwithstanding the foregoing, if Landlord is obligated to
make monthly escrows of Taxes to any Senior Interest Holder and as a
result thereof, Landlord requires all tenants of the Building under
leases with Landlord to make escrows of Taxes, then in lieu of the
manner of payment referred to above, on the first day of the month
following the furnishing to Tenant of a statement of Taxes, Tenant shall
pay to Landlord a sum equal to 1/12th of the payment of Taxes shown
thereon to be due for such fiscal year for real estate tax purposes
adopted by the applicable taxing authority then imposing taxes (the "TAX
YEAR") multiplied by the number of months of the Term then elapsed since
the commencement of such Tax Year. Tenant shall continue to pay to
Landlord a sum equal to 1/12th of the payment of Taxes shown on such
statement on the first day of each succeeding month until the first day
of the month following the month in which Landlord shall deliver to
Tenant a new statement of Taxes. If the escrows of Taxes required to be
made by Landlord with any Senior Interest Holder are required to be made
other than monthly, then the obligations of Tenant referred to in the
immediately preceding two (2) sentences shall be appropriately modified
so that Tenant shall make the payment of Taxes to Landlord in the same
number of installations as Landlord is required to make to such Senior
Interest Holder. In the event the escrows of Taxes required to be made
by Landlord with any Senior Interest Holder are held in an interest
bearing account, then Tenant's payment of Taxes shall be reduced by
Tenant's Share of the actual interest received by Landlord in connection
therewith. If Landlord shall not furnish to Tenant a statement of Taxes
prior to the commencement of such Tax Year, then Tenant shall continue
to make monthly installment payments based upon the previous Tax Year's
statement of Taxes until Landlord shall furnish a new statement of Taxes
with respect to the then current Tax Year. If Landlord furnishes a
statement of Taxes for a Tax Year subsequent to the commencement
thereof, promptly after the statement of Taxes is furnished to Tenant,
Landlord shall give notice to Tenant stating whether the amount
previously paid by Tenant to Landlord for the current Tax Year was
greater or less than the installments of Tenant's payment of Taxes for
the current Tax Year, and (1) if there shall be a deficiency, Tenant
shall pay the amount thereof within thirty (30) days after demand
therefor, or (2) if there shall have been an overpayment, such excess
shall be refunded to Tenant within thirty (30) days of the rendition of
the aforementioned statement to Tenant. If there shall be any increase
or decrease in Taxes for any Tax Year, whether during or after such Tax
Year, then Landlord shall furnish a revised statement of Taxes for such
Tax Year, and Tenant's payment of Taxes for such Tax Year shall be
adjusted and paid or credited, as the case may be, substantially in the
same manner as provided in the preceding sentence. If the Tax Year
established by the applicable taxing authority shall be changed, any
Taxes for the Tax Year prior to such change which are included within
the new Tax Year and which were the subject of a prior statement of
Taxes shall be apportioned for the purpose of calculating Tenant's
payment of Taxes payable with respect to such new Tax Year.
<PAGE> 27
If a separate real property tax bill is not issued for the Premises at
any time during the Term, but Landlord receives a tax bill for a larger
parcel of real property including the Premises, Landlord shall bill
Tenant for a pro rata share of such taxes. Landlord shall provide Tenant
with an invoice therefor together with a detailed explanation of any
proration, which proration shall be made on the basis of Tenant's Share
of the ratio between Floor Area of the Premises and the total square
feet of the Floor Area of the other tenantable portions of the taxed
unit of which the Premises form part. If Landlord shall receive any
bills, assessments or other official notices regarding any such taxes or
other charges, it shall promptly forward the same to Tenant, but an
inadvertent failure (or failures) to do so shall not be deemed a breach
hereof. All such taxes, assessments, charges and the like billed
directly to Tenant or passed on to Tenant by Landlord and paid by Tenant
pursuant to the provisions of this Section 12.1 shall be excluded from
Common Area Expenses or Operating Expenses, as applicable. All taxes
becoming a lien upon the Premises or any portion thereof during the
first and last Tax Year shall be prorated between Landlord and Tenant to
the first and last day of the Term, respectively. Upon Tenant's request,
Landlord shall furnish to Tenant proof reasonably satisfactory to Tenant
of payment of the matters referred to in this Article. If the Premises
are separately assessed for real property taxes, Tenant shall have the
right, following notice to Landlord, to protest, contest or object to
the amount or validity of any such taxes, impositions or assessments;
provided, however, that this right to contest shall not be deemed or
construed to relieve, modify or extend Tenant's obligation to pay any
such tax, imposition or assessment before delinquency thereof unless
Tenant has provided a bond or other security satisfactory to Landlord.
Tenant shall indemnify and defend Landlord and save Landlord harmless
from all costs, liabilities and expenses incurred in connection with
such proceedings.
12.2 Trade Fixtures. Tenant shall be liable for and shall pay, before
delinquency, all taxes levied against Trade Fixtures.
12.3 Protest. Tenant shall have the right, at its sole cost, to request
Landlord, by notice to Landlord given not less than ten (10) days before
the last date for filing any necessary protest or petition or taking any
other necessary action, to initiate and prosecute any proceeding for the
purpose of reducing the assessed valuation of the Premises for tax
purposes. In the event that Tenant in good faith shall request Landlord,
pursuant to the preceding sentence, to initiate and prosecute any
proceeding, Landlord shall, subject to the requirements imposed by any
mortgage of Landlord's interests in the Development, at Tenant's sole
expense, take all steps reasonably necessary to commence such proceeding
and thereafter shall diligently prosecute the same to completion. Any
actual out-of-pocket costs, including reasonable attorneys' fees and
costs, incurred by Landlord in connection with any such proceeding
brought at Tenant's request shall be payable upon demand, as Additional
Rent, by Tenant to Landlord. Any refund of moneys received by Landlord
resulting from such proceeding attributable to the Premises and relating
to real property taxes which may have been paid by Tenant shall be
refunded by Landlord to Tenant, together with all accrued interest which
is awarded thereon and received by
<PAGE> 28
Landlord; provided that if any such refund shall be made with respect to
Landlord's property other than the Premises, then Tenant's right to the
same shall be limited to its pro rata portion thereof, after payment or
credit first (to the extent such monies are received by Landlord from
the taxing authority), to Tenant for Landlord's costs previously paid by
Tenant to Landlord as above provided and second (after all costs
incurred by Landlord have been recovered), for any other actual
out-of-pocket costs, including reasonable attorneys' fees and costs,
incurred by Tenant in connection with any such proceeding. Tenant's
rights to refunds under this Section 12.3, if any, shall survive the
expiration of this Lease.
12.4 Definition. As used in this Article 12, the term "REAL PROPERTY TAXES"
shall include any form of assessment, license fee, license tax, business
license fee, commercial rental tax, levy, charge, tax or similar
imposition, imposed by any authority having the direct power to tax,
including any city, county, state or federal government, or any school,
agricultural, lighting, drainage or other improvement or special
assessment district thereof, as against any legal or equitable interest
of Landlord in the Premises, including, but not limited to, the
following: any tax on Landlord's "right" to rent or "right" to other
income from the Premises or as against Landlord's business of leasing
the Premises; any assessment, tax, fee, levy or charge in substitution,
partially or totally, of any assessment, tax, fee, levy or charge
previously included, within the definition of real property taxes
("IN-LIEU TAX"); any assessment, tax, fee, levy or charge allocable to
or measured by the area of the Premises or the rent payable hereunder
("RECEIPTS TAX"), including any gross income tax or excise tax levied by
the state, city or federal government, or any political subdivision
thereof, with respect to the receipt of such rent, or upon or with
respect to the possessing, leasing, operating, managing, maintaining,
altering, repairing, using or occupying by Tenant of the Premises or any
portion thereof; any assessment, tax, fee, levy or charge upon this
transaction or upon any document to which Tenant is a transferring party
creating or transferring an interest or an estate in the Premises; any
assessment, fee, levy or charge by any governmental agency related to
any transportation plan, fund or system instituted within the geographic
area of which the Premises are a part; and reasonable legal and other
professional fees, costs and disbursements incurred in connection with
proceedings to reasonably contest, determine or reduce real property
taxes. Notwithstanding any provision of this Article 12 expressed or
implied to the contrary, Tenant shall not be required to pay any
documentary transfer taxes or recording taxes incurred by Landlord or
Landlord's federal or state income, franchise, inheritance or estate
taxes or any local income, franchise, inheritance or estate taxes, or
other taxes in lieu thereof, except for any In-Lieu Tax or any Receipts
Tax.
13. Condition of Premises.
13.1 Landlord's Work. Landlord hereby agrees to cause to be completed those
acts and/or improvements described as the Landlord's Work in the Work
Letter within the time(s) set forth therein, subject to Force Majeure or
any Tenant Delay. Landlord hereby agrees that all work to be performed
by Landlord pursuant to the Work Letter shall be constructed by Landlord
or Landlord's contractor in a good and workmanlike first-class
<PAGE> 29
manner and in full compliance with all governmental regulations,
ordinances and laws existing at the time of construction. Landlord
agrees to abide by its obligations, if any, under the CC&R. By taking
possession of the Premises upon completion of the Landlord's Work and
for commencement of the construction of the Improvements, Tenant shall
be deemed to have: (i) acknowledged that Landlord's Work is
substantially complete and is accepted "as is" and "with all faults";
(ii) accepted the Premises as suitable for the purposes for which the
Premises are leased; and (iii) acknowledged that the Premises are in a
good and satisfactory condition, except as otherwise expressly provided
in the Work Letter. Landlord hereby disclaims, and Tenant hereby waives
to the full extent permitted by law, any implied warranty that the
Premises are suitable for Tenant's intended commercial purpose, and any
and all other implied warranties (whether arising by virtue of statute,
case law or otherwise). The foregoing provisions shall not be construed
to relieve Landlord from its obligations which are expressly set forth
in this Lease.
13.2 Design Changes. In order to provide Landlord with the necessary
flexibility in the planning and organizing of the Building, Tenant
agrees that the design of the Building (including the location of the
demising walls for the Premises) and elements of Landlord's Work shall
be subject to such changes as Landlord shall deem to be necessary or
beneficial to the Building or its tenants; provided, however, that the
resulting Premises shall be substantially equivalent for Tenant's
purposes as prior to such changes.
14. Alterations.
14.1 Landlord's Approval. From and after the later of (i) the Commencement
Date, or (ii) completion of the Improvements, Tenant, without obtaining
Landlord's prior consent, may only make alterations, additions or
improvements in or to the Premises which (a) are nonstructural in
nature, and (b) do not affect the exterior of the Premises or other
exterior portions of the Improvements (but only to the extent generally
visible from the Common Areas). All alterations, additions and
improvements other than those described in clauses (a) and (b) hereof
shall require Landlord's prior consent. Before proceeding with any
alteration, addition or improvement which requires Landlord's prior
consent hereunder, Tenant shall submit to Landlord plans and
specifications, including any applicable mechanical, electrical and
plumbing drawings, for the work to be done, which plans and
specifications shall require Landlord's approval. If Landlord shall
disapprove of any of Tenant's plans and specifications, Tenant shall be
advised of the reasons for such disapproval.
14.2 Requirements. Tenant agrees to provide Landlord with notice of all
alterations, additions or improvements Tenant intends to make to the
Premises whether or not they require Landlord's prior consent as
provided above. Tenant shall cause Tenant's contractor to obtain on
behalf of Tenant and at Tenant's sole cost and expense all necessary
governmental permits and certificates for the commencement and
prosecution of any alteration, addition or improvement and for final
approval thereof upon completion. All such work shall be done at such
times and in such manner as Landlord may from time to time designate.
Tenant covenants and agrees that all work done by
<PAGE> 30
Tenant shall be performed in full compliance with the Condominium
Documents, the CC&R, in full compliance with all laws, rules, orders,
ordinances, regulations and requirements of all governmental agencies,
offices, and boards having jurisdiction, and in full compliance with the
rules, regulations and requirements of any insurance rating bureau
having jurisdiction of the Premises or the Building. Before commencing
any work, Tenant shall give Landlord at least ten (10) days notice of
the proposed commencement of such work in order to provide Landlord with
an opportunity to post notices of nonresponsibility. Tenant further
covenants and agrees that any mechanic's lien recorded against the
Premises or the Building for work claimed to have been done for, or
materials claimed to have been furnished to Tenant, will be discharged
by Tenant, by bond or otherwise, as provided in Article 16 hereof. All
alterations, additions or improvements upon the Premises made by either
party, including all wallcovering, built-in cabinetry, paneling and the
like, shall, at Landlord's option, upon the expiration or earlier
termination of this Lease become the property of Landlord, and shall, at
such time, remain upon, and be surrendered by Tenant with the Premises,
as a part thereof. Notwithstanding anything to the contrary contained in
this Lease, in connection with Tenant seeking to obtain any permit,
certificate and/or approval from the Boston Redevelopment Authority
("BRA") with respect to any alteration, addition or improvement, Tenant
shall furnish Landlord with copies of all notices and documents
submitted to the BRA so that Landlord may be kept fully informed in
respect thereof, Landlord may, at its election, reasonably participate
in the same and at the election of Landlord, Tenant shall retain, at
Tenant's sole cost and expense, a Person designated by Landlord and
approved by Tenant to obtain any such permit, certificate and/or
approval from the BRA, provided that any such designation shall not
cause a delay (in more than a de minimis manner) in the obtaining of any
such permit, certificate and/or approval by Tenant, it being understood
and agreed that Landlord shall not be liable to Tenant in connection
with such participation of Landlord and the retaining of such Person by
Tenant in connection with the obtaining of any such permit, certificate
and/or approval.
14.3 Removal. All articles of personal property and movable furniture,
including Trade Fixtures and any other of Tenant's furniture and
equipment which are installed by Tenant at its expense in the Premises
shall be and remain the property of Tenant and may be removed by Tenant
at any time during the Term provided Tenant repairs any damage caused by
such removal. If Tenant shall fail to remove all of its effects from the
Premises upon the expiration or earlier termination of this Lease, for
any cause whatsoever, Landlord may, at it option, remove the same in any
manner that Landlord shall choose, and store said effects without
liability to Tenant for loss thereof so long as Landlord exercises
reasonable care in doing so. In such event, Tenant agrees to pay
Landlord upon demand any and all reasonable expenses actually paid to
third parties incurred in such removal, including court costs and
attorneys' fees and costs and storage charges on such effects for any
length of time that the same shall be in Landlord's possession. Landlord
may, at its option, upon at least ten (10) business days' prior notice
to Tenant of the date, time and place of the sale of such effects, or
any of the same, sell any such affects at a private sale and without
legal process, for such price as Landlord may obtain and apply the
proceeds of such sale to any amounts due under this Lease from Tenant to
Landlord
<PAGE> 31
and to the expense incident to the removal and sale of said effects. Any
rights of Landlord under this Section 14.3 shall be subject to the
rights of lienholders with a security interest in Tenant's personal
property pursuant to Section 1.2 hereof.
15. Repairs.
15.1 Tenant's Obligations. Except as otherwise hereinafter provided, Tenant,
at Tenant's sole cost and expense, shall (i) keep, maintain (including
necessary replacements) and preserve the Property and every portion
thereof, all equipment, facilities and amenities used in connection
therewith and all items located on or about the Property, including
elevators servicing the Premises, plumbing, mechanical systems, floors
and utility systems (including HVAC system) and all portions thereof in
first-class condition and repair, (ii) when and if needed, at Tenant's
sole cost and expense (subject to the damage and destruction provisions
herein), make all repairs to the Property and every portion thereof
including the interior walls but excluding the structural columns
described in Section 15.2 hereof, (iii) repaint the interior and the
exterior of the Improvements as necessary, (iv) replace all broken
window glass, and (v) repair all facilities except for the structural
elements described in Section 15.2 hereof. Tenant's obligation to keep,
maintain, preserve and repair the Premises shall specifically extend to
the cleanup and removal of all Hazardous Materials to the extent
required by Tenant in Article 8 hereof. Tenant shall, upon the
expiration or earlier termination of the Term, surrender the Property to
Landlord in its condition as of the commencement of Tenant's operation
of the Club for member use, usual and ordinary wear and tear and any
alterations, additions and improvements permitted under this Lease
excepted, and except as otherwise provided in Articles 21 and 22 hereof.
Landlord shall have no obligation to alter, remodel, improve, repair,
decorate or paint the Property or any part thereof, except as provided
in Section 15.2 hereof and except for cleanup and removal of Hazardous
Materials to the extent required in Article 8 hereof. The parties hereto
affirm that Landlord has made no representations to Tenant respecting
the condition of the Property except as specifically set forth in
Article 13 hereof. In addition, the parties hereto affirm that Landlord
shall have absolutely no obligation to keep, maintain or repair any
portion of the interior of the Premises except as herein expressly
provided. Landlord shall be responsible for repairs to the Property
caused by the negligence or willful misconduct of Landlord or its
employees, agents, or contractors. Notwithstanding the foregoing, to the
extent that insurance carried by Landlord or Tenant provides coverage
for the cost of any maintenance or repair or replacement which is
Tenant's obligation pursuant hereto, Tenant shall be entitled to all
benefits of such insurance.
15.2 Landlord's Obligations. Landlord shall (subject to reimbursement
therefor pursuant to Section 7 hereof) keep, maintain and repair, or
cause to be kept, maintained and repaired, the Building (exclusive of
the Property) and the Common Areas in a first-class manner and be
responsible for the repair and maintenance of the structural elements of
the Development except to the extent that the necessity for any repair
or maintenance shall be attributable to alterations performed by or
through Tenant or by the negligence or willful misconduct of Tenant or
its employees, agents, contractors, licensees or invitees.
<PAGE> 32
Notwithstanding the foregoing, Landlord shall (without being subject to
reimbursement therefor pursuant to Section 7 hereof) repair all defects
in Landlord's construction of the Club (if and to the extent expressly
provided in the Work Letter) and Common Areas. Landlord shall grant
easements and/or grant rights of way to the extent necessary for utility
companies to bring those services identified in the Work Letter to the
Premises.
16. Liens.
Except with respect to a security agreement, financing statement,
financing lien or other instrument securing the financing of Trade Fixtures and
Tenant's other furniture, fixtures, equipment and improvements approved by
Landlord, Tenant shall not permit to be recorded against the Premises or any
portion of the Development or against Tenant's leasehold interest in the
Premises, any mechanics', materialmen's or other liens, including any state,
federal or local Hazardous Material clean-up liens for which Tenant is
responsible under Article 8 hereof. Landlord shall have the right at all
reasonable times to post and keep posted on the Premises any notices which it
deems necessary for protection from such liens. If any such lien is recorded,
and is not discharged by Tenant by bond or otherwise within thirty (30) days
after the recording thereof, Landlord may, without waiving its rights and
remedies based on such breach of Tenant and without releasing Tenant from any of
its obligations, cause such liens to be released by any means it shall deem
proper, including payment in satisfaction of the claim giving rise to such lien.
Tenant shall pay to Landlord on demand, upon notice by Landlord, any sums
incurred by Landlord to remove such liens, together with Landlord's reasonable
attorneys' fees and costs and other expenses incurred by Landlord in connection
with obtaining such release and interest on such sums at the lesser of (i) the
rate of twelve percent (12%) per annum and (ii) the highest rate then legally
permissible from the date of such payment by Landlord. Tenant expressly reserves
the right to contest the validity of any such liens and to post bonds suitable
to cause the release of any such liens so long as (a) prior to any such contest
(and no later than thirty (30) days after such lien has been filed) Tenant at
its sole expense provides to Landlord a bond indemnifying against such lien that
complies with all applicable laws, and (b) Tenant contests such lien diligently
and in good faith; provided, however, the foregoing right of Tenant to contest
any such lien shall not impair or otherwise affect Tenant's indemnification and
other obligations with respect to such lien.
17. Entry by Landlord.
During normal business hours upon giving at least one (1) business day's
prior notice to Tenant (except in the case of emergencies, in which case no
notice shall be necessary), Landlord reserves and shall at any and all
reasonable times have the right to enter the Premises and the Improvements to
(i) inspect the same, (ii) show the Premises and the Improvements to prospective
lenders or purchasers (and prospective tenants during the last twelve (12)
months of the Term), (iii) post notices of nonresponsibility, and (iv) alter,
improve or repair the Common Areas or any other portion of the Development, all
without being deemed guilty of any eviction of Tenant or breach of quiet
enjoyment and without abatement or reduction of rent. Landlord shall provide
Tenant with the opportunity to escort Landlord with regard to any entry pursuant
hereto (except in case of an emergency). Landlord shall indemnify Tenant and
hold Tenant harmless from and against any and all claims, damages, losses or
costs (excluding consequential
<PAGE> 33
damages) actually incurred by Tenant as a result of Landlord's entry upon the
Premises pursuant to this Article 17 to the extent not covered by insurance
carried by Tenant or required to be carried by Tenant hereunder. Landlord may,
in order to carry out such purposes, erect scaffolding and other necessary
structures if reasonably required by the character of the work to be performed,
provided that to the extent within Landlord's reasonable control, the business
of Tenant shall be interfered with as little as is reasonably practicable (it
being agreed that Landlord shall not be required to employ overtime or premium
labor). It is understood and agreed that no provision of this Lease shall be
construed as obligating Landlord to perform any repairs, alterations or
decorations except as otherwise expressly agreed herein by Landlord.
18. Utilities and Services.
18.1 From and after Substantial Completion of Landlord's Work, Tenant agrees
to pay all charges for utilities and services used by it in the
Premises, including, but not limited to, gas, electricity, telephone,
sanitary sewer, storm drainage, water, and trash collection. Landlord
shall supply hot water for heat as described in the Work Letter to such
distribution facilities designated in the Design Development Plans (as
defined in the Work Letter). Tenant shall maintain in good working order
and make all necessary repairs and replacements to such distribution
facilities to the extent the same are located within or exclusively
service the Premises, at Tenant's own cost and expense. Such hot water
shall be supplied to the Premises at such times and periods as Tenant
shall reasonably require for conducting its business at the Premises in
the manner contemplated by this Lease and the Work Letter (not to exceed
eighteen (18) hours per day). Landlord shall supply (or cause to be
supplied) chilled water to the Premises as described in the Work Letter
at such hours (not to exceed eighteen (18) hours per day) as Tenant may
designate. Within thirty (30) days following demand therefor, Tenant
shall pay to Landlord, as Additional Rent, Landlord's then established
charges which shall not exceed one hundred percent (100%) of Landlord's
out-of-pocket costs for the quantities of such hot water and condenser
water (except as otherwise specifically provided in the Work Letter) as
Tenant may consume, as shown on the meter(s) installed by Landlord (but
maintained by Tenant). Subject to Landlord's obligation to make utility
easements and rights of way available pursuant to the provisions of
Section 15.2 hereof and to bring utility lines to the Premises pursuant
to Section 1.1 hereof, Landlord shall not be liable for damages or
otherwise for any failure or interruption of any utility or other
service furnished to the Premises, unless such failure shall be due to
the negligence or willful misconduct of Landlord, its agents, licensees
or employees and is not covered by rent abatement and business
interruption insurance carried or required to be carried by Tenant.
Subject to Landlord's obligation to make utility easements and rights of
way available pursuant to the provisions of Section 15.2 hereof and to
bring utility lines to the Premises pursuant to Section 1.1 hereof,
Landlord does not warrant that any of the utilities and services
mentioned herein will be free from interruptions caused by repair,
renewals, improvements, alterations, strikes, lockouts, accidents,
inability of Landlord to obtain fuel or supplies, or any other cause or
causes beyond the reasonable control of Landlord. Any such interruption
of service shall never be deemed an eviction or disturbance of
<PAGE> 34
Tenant's use and possession of the Premises, or any part thereof, or
give Tenant any right to terminate this Lease.
18.2 Tenant agrees that it will not install any equipment which will exceed
or overload the capacity of any utility facilities, and that if any
equipment installed by Tenant shall require additional utility
facilities in excess of those specified in the Work Letter, the same
shall be installed at Tenant's expense in accordance with plans and
specifications to be approved in writing by Landlord in accordance with
the standards set forth in Article 14 hereof.
19. Indemnification.
19.1 Tenant's Indemnity. Notwithstanding (i) the limits of Tenant's insurance
specified in Section 20.1 hereof and (ii) whether Tenant's insurance
shall be in full force and effect, Tenant shall indemnify, defend and
hold Landlord and the Condominium Association (if applicable) harmless
from all costs, expenses, penalties, claims, demands and liabilities
("CLAIMS") arising from Tenant's use of the Property or the conduct of
its business or from any activity, work, or thing done by Tenant in or
about the Premises. Tenant shall further indemnify, defend and hold
Landlord and the Condominium Association (if applicable) harmless from
all Claims arising from any Default, or arising from any act, neglect,
fault or omission of Tenant or of its agents, employees or licensees in
the Premises, or arising from any act, neglect, fault or omission of
Tenant's invitees in the Premises, and from and against all costs,
attorneys' fees and costs, expenses and liabilities incurred in
connection with such Claim or any action or proceeding brought thereon,
but this indemnity shall not extend to Claims to the extent resulting
from negligent acts or omissions or willful misconduct of Landlord or
the Condominium Association, as applicable, their respective employees,
agents, licensees or invitees, to consequential or punitive damages or
to Claims that are as applicable covered by property insurance carried
by Landlord or the Condominium Association or required to be carried by
Landlord hereunder. In case any action or proceeding shall be brought
against Landlord and/or the Condominium Association, as applicable, by
reason of any such Claim, Tenant, upon notice from Landlord and/or the
Condominium Association, as applicable, shall defend the same at
Tenant's expense by counsel approved by Landlord and/or the Condominium
Association, as applicable. Tenant, as a material part of the
consideration to Landlord, hereby assumes all risk of damage to property
or injury to persons in, upon or about the Property from any cause
whatsoever, except that for which Landlord may be liable pursuant to the
indemnity contained in Section 19.2 hereof.
19.2 Landlord's Indemnity. Landlord shall indemnify, defend and hold Tenant
harmless from any and all Claims arising from any activity, work, or
thing done by Landlord in or about the Development (exclusive of the
Premises). Landlord shall further indemnify, defend and hold Tenant
harmless from all Claims arising from any breach or default in the
performance of any obligation to be performed by Landlord under the
terms of this Lease or arising from any act, neglect, fault or omission
of Landlord or of its licensees, invitees, agents or employees within
the Development (exclusive of the Premises) (provided, however, it is
agreed that tenants or other occupants of the
<PAGE> 35
Development and their respective licensees, invitees, agents or
employees shall not be deemed to be Landlord's licensees, invitees,
agents or employees) and from and against all costs, attorneys' fees and
costs, expenses and liabilities incurred in connection with such Claims
or any action or proceeding brought thereon, but this indemnity shall
not extend to Claims to the extent resulting from the negligent acts or
omissions or willful misconduct of Tenant, its employees, agents or
licensees, to consequential or punitive damages or to Claims that are
covered by property insurance carried by Tenant or required to be
carried by Tenant hereunder. In case any action or proceeding shall be
brought against Tenant by reason of any such Claims, Landlord, upon
notice from Tenant, shall defend the same at Landlord's expense by
counsel approved by Tenant; it being agreed that Battle Fowler LLP
and/or counsel designated by Landlord's insurer are acceptable to Tenant
for such purpose.
19.3 No Release of Insurers. Tenant's and Landlord's indemnification
obligations under Sections 19.1 and 19.2 hereof are not intended to and
shall not relieve any insurance carrier of its obligations under
policies carried by Landlord or Tenant, and such indemnification
obligations shall survive the expiration or earlier termination of this
Lease.
20. Insurance.
20.1 Tenant's Insurance. Tenant shall, during the Term and any other period
of occupancy of the Premises, at its sole cost and expense, keep in full
force and effect the following insurance:
(1) Property. Standard form property insurance insuring against
the perils of fire, extended coverage, vandalism, malicious mischief,
special extended coverage ("ALL-RISK") and sprinkler leakage, covering
all property owned by Tenant, for which Tenant is legally liable or that
was installed solely at Tenant's expense, and which is located on the
Premises, including interior improvements, furniture, fittings,
installations, Trade Fixtures, equipment, facilities and any other
personal property and any alterations, additions and improvements
constructed by Tenant pursuant to Section 14.1 hereof (but excluding any
property required to be insured by Landlord under Section 20.4 hereof),
in an amount not less than the full replacement cost thereof. All
proceeds from the insurance required under this Section 20.1(i) shall be
used for the repair, restoration or replacement of the damaged or
destroyed property unless this Lease terminates pursuant to Section 21
hereof, in which event the provisions of Section 20.3 hereof shall
control.
(2) Liability. Comprehensive General Liability Insurance
insuring Tenant against any liability arising out of the lease, use,
occupancy or maintenance of the Premises and all areas appurtenant
thereto. Such insurance shall be in the amount of not less than
$5,000,000.00 Combined Single Limit for injury to, or death of, one or
more persons in an occurrence, and for damage to tangible property
(including loss of use) in an occurrence. Any such coverage requirement
may be satisfied by an umbrella policy. Such policies shall insure the
hazards of premises and operations, independent
<PAGE> 36
contractors, contractual liability (covering the indemnity contained in
Section 19 hereof) and shall (a) name Landlord, the Condominium
Association (if applicable) and any mortgagee of Landlord as additional
insureds, (b) contain a cross liability provision, and (c) contain a
provision that "the insurance provided Tenant hereunder shall be primary
and noncontributing with any other insurance available to Landlord or
the Condominium Association," so long as such provision may be
available. The limit of insurance required pursuant to this Section
20.1(ii) shall be subject to review by Landlord and, to the extent that
the amount of such insurance is less than the limits normally and
customarily maintained with respect to Similar Premises (as hereinafter
defined), Landlord, from time to time, may require Tenant to increase,
or cause to be increased, such limit (but Landlord shall not require
such increases more frequently than once every ten (10) years). Any
dispute as to the reasonableness of any such increase in the insurance
limit which Landlord shall purport to require of Tenant under this
Section, from time to time, shall be submitted to arbitration pursuant
to Section 7.3 hereof; provided, however, that Tenant shall maintain
insurance for the disputed policy limit during the pendency of any such
arbitration proceeding. As used herein, the term "SIMILAR PREMISES"
shall mean the first-class mixed-use buildings being located in Boston,
Massachusetts, or other first-class mixed-use buildings or premises
having business operations of a nature and character substantially
similar to the nature and character of the business operations being
conducted at the Premises, and being located in Boston, Massachusetts.
(3) Workers' Compensation. Workers' Compensation and Employer's
Liability insurance (as required by state law).
(4) Rental Interruption. Twelve (12) months rent abatement and
business interruption insurance which shall cover Tenant's monetary
obligations under this Lease and any direct or indirect loss of earnings
attributable to perils insured against under extended coverage all-risk
property insurance; provided, however, that Tenant shall be entitled to
self-insure such risk.
(5) Liquor. Liquor liability insurance coverage with
commercially reasonable coverage limits, but in no event less than
$5,000,000.00 per occurrence, naming Landlord, the Condominium
Association and any mortgagee of Landlord as additional insureds. Any
such coverage requirement may be satisfied by an umbrella policy.
20.2 Requirements. All policies required of Tenant shall be written by an
insurer satisfactory to Landlord. Such policies shall name Landlord and
the Senior Interest Holders (as hereinafter defined) of which Tenant has
notice as additional insureds. Prior to the date Tenant enters the
Premises, but in no event later than sixty (60) days after the execution
of this Lease, Tenant shall deliver to Landlord copies of policies or
certificates evidencing the existence of the amounts and forms of
coverage required (or, in the event of self-insuring as permitted in
Section 20.1(iv) hereof only, evidence of the net worth of Tenant or a
Person providing a guaranty of this Lease to Landlord of not less than
$10,000,000). No such policy shall be cancelable or reducible in
coverage except after thirty (30) days' prior written notice to
Landlord. Tenant shall, within thirty (30) days
<PAGE> 37
prior to the expiration of any such policies, furnish Landlord with
renewals, certificates of insurance, or "binders" thereof, and, if
Tenant fails to do so within ten (10) days following notice of such
failure, then, upon an additional notice to Tenant, Landlord may order
such insurance and charge the cost thereof to Tenant as Additional Rent.
If Landlord obtains any insurance that is the responsibility of Tenant
under this Article 20, Landlord shall deliver to Tenant a statement
setting forth the cost of any such insurance and showing in reasonable
detail the manner in which it has been computed, and, if obtainable, a
certificate of insurance naming Tenant as the insured or as an
additional insured. Tenant's obligation to carry insurance provided for
in this Article 20 may be satisfied by inclusion within the coverage of
any blanket policy or policies of insurance carried or maintained by
Tenant, provided that the coverage required herein will not be reduced
or diminished by reason of the use of such blanket policies of insurance
and any such blanket policies of insurance expressly waive any pro rata
distribution requirement contained in any such policies of insurance
covering the Premises.
20.3 Proceeds Upon Termination. In the event of damage to or destruction of
the Improvements resulting in termination of this Lease pursuant to
Article 21 hereof, (i) Landlord shall be entitled to all proceeds of the
insurance required to be maintained under Section 20.4 hereof (subject
to Landlord's obligation to cause such proceeds to be disbursed for the
purposes of restoration, as herein provided) and (ii) Tenant shall
immediately pay to Landlord all of its property insurance proceeds, if
any, plus any deductible amount (subject to the limitation described
below) relating to the Improvements and all other items of property
which would have become Landlord's property upon expiration or earlier
termination of this Lease absent such damage or destruction (but not
relating to Trade Fixtures or Tenant's other equipment, furniture or
personal property). Notwithstanding the foregoing, Tenant shall not be
required to pay any such deductible amounts to Landlord unless Landlord
can reasonably demonstrate that Landlord has entered into a new lease
with a non-Affiliate of Landlord for an athletic club in the Premises
for a lease term of not less than ten (10) years within twelve (12)
months after the termination of this Lease.
20.4 Landlord's Insurance. Landlord may, but shall not be obligated to, take
out and carry any form or forms of insurance ("LANDLORD'S INSURANCE") as
it may reasonably determine advisable, or as may be required by
Landlord's mortgagee; provided, however, that Landlord shall be required
to carry (i) Comprehensive General Liability Insurance in amounts not
less than those required of Tenant pursuant to Section 20.1 hereof and
(ii) insurance against any peril insurable under an all-risk property
insurance policy covering the Improvements, exclusive of any item
insured by Tenant pursuant to Section 20.1(i) hereof, in an amount which
is one hundred percent (100%) of the full replacement cost of the
Improvements. Landlord's obligation to carry the all-risk property
insurance provided for in this Section 20.4 may be satisfied by
inclusion of the Improvements within the coverage of any blanket policy
or policies of insurance carried or maintained by Landlord, provided
that the coverage required herein will not be reduced or diminished by
reason of the use of such blanket policies of insurance. Tenant shall
reimburse Landlord, as Additional Rent payable in equal monthly
installments, the cost of the all-
<PAGE> 38
risk property insurance for the Improvements required by this Section
20.4 commencing within thirty (30) days following demand therefor, and
the premiums for such insurance will not be included in the Insurance
Escalation (as defined herein). In the event such all-risk property
insurance covers improvements other than the Improvements, Tenant's pro
rata share will be that proportion that the Floor Area of the
Improvements bears to the total Floor Area of all improvements covered
by such policy.
20.5 Insurance Escalation. Except for Landlord's cost of the all-risk
property insurance for the Improvements, as addressed in Section 20.4
hereof, if Landlord's cost of obtaining Landlord's Insurance for the
Property and/or the Building and the operations thereof exceeds the cost
of obtaining such insurance for the first twelve (12) months following
the Commencement Date, Tenant shall pay to Landlord, as Additional Rent,
within thirty (30) days, after being billed therefore, an amount equal
to Tenant's Share of such increased cost.
20.6 Compliance. Landlord and Tenant shall promptly comply with all
reasonable requirements of the insurance authority or of any insurer now
or hereafter relating to the Premises.
20.7 Waiver of Subrogation. All policies of all-risk, fire, extended coverage
or similar property insurance which either party obtains or is required
to maintain in connection with the Development, and the insurance
required to be obtained by Tenant pursuant to the provisions of Section
20.1 (iv) hereof, and, if obtainable, all liability policies, shall
include or shall be deemed to include a clause or endorsement denying
the insurer any rights of subrogation against the other party. Landlord
and Tenant waive all rights of recovery against the other for injury or
loss due to hazards covered by insurance containing or deemed to contain
such a waiver of subrogation clause or endorsement to the extent of the
injury or loss covered thereby.
21. Damage or Destruction.
21.1 (i) Tenant's Reconstruction. In the event the Improvements shall be
damaged by fire or other perils and this Lease shall not be terminated
as hereafter provided, Tenant, at its sole cost and expense, shall
within a period of thirty (30) days thereafter, commence repair,
reconstruction and restoration of the Improvements to their condition
existing immediately prior to such damage and prosecute the same
diligently to completion in compliance with all applicable laws, and
this Lease shall continue in full force and effect unless this Lease is
terminated as hereinafter provided. Any such repair, reconstruction and
restoration shall be performed strictly in accordance with the
provisions of Article 14 hereof and Tenant shall be entitled to apply
the insurance proceeds to the repair, reconstruction and restoration in
the manner provided in Section 21.2 hereof. If at any time Tenant shall
fail to prosecute such work of repair or rebuilding with diligence, then
Landlord may give to Tenant notice of such failure and if such failure
continues for twenty (20) days thereafter, then Landlord, in addition to
all other rights which it may have, may, at Tenant's sole cost and
expense, enter upon the Premises, provide labor and/or materials, cause
the performance of any contract and/or take such other action as it
<PAGE> 39
may deem advisable to prosecute such work. For this purpose, any
contracts made by Tenant for purposes of accomplishing repair,
reconstruction and restoration of the Improvements shall be in a form
assignable to Landlord and shall be subject to Landlord's approval.
Landlord shall be entitled to reimbursement for its costs and expenses
in performing such work from any insurance proceeds and any other moneys
held by the Depository (as defined herein) for application to the cost
of such work in accordance with Section 21.2 hereof. All costs and
expenses incurred by Landlord in carrying out such work for which it is
not reimbursed by the Depository shall be paid by Tenant upon demand,
which demand may be made by Landlord periodically as such costs and
expenses are incurred, in addition to any damages to which Landlord may
be entitled hereunder.
(ii) Uninsured Casualty. In the event the Improvements shall be
damaged by peril which is not covered by insurance required to be
maintained hereunder (or which is otherwise maintained, if to a greater
standard), and if a duly qualified contractor certifies, in good faith
and fair dealing, that the amount required to repair such damage exceeds
the Uninsured Contribution Amount (as defined herein), Tenant shall have
the option to terminate this Lease upon giving notice to Landlord of its
exercise of such termination option within sixty (60) days after such
damage or destruction. Upon such termination of this Lease, the parties
shall be released without further obligations to the other coincident
with the surrender of possession of the Premises to Landlord, except for
items which theretofore accrued and are then unpaid and any obligations
specified in this Lease which are to survive the termination of this
Lease. Notwithstanding the foregoing, in the event that Tenant exercises
its option to terminate this Lease pursuant to the provisions of this
Section 21.1 (ii), Landlord shall have the option, exercisable within
thirty (30) days after Landlord's receipt of Tenant's termination
notice, to notify Tenant that Landlord elects to fund the amount
required to repair such damage and destruction in excess of the
Uninsured Contribution Amount (as defined herein), in which case such
repair, reconstruction and restoration shall be performed pursuant to
the procedures set forth in this Section 21.1(ii), except that Tenant
shall contribute the Uninsured Contribution Amount and Landlord shall
fund any additional amounts necessary to accomplish such repair,
reconstruction and restoration. The "UNINSURED CONTRIBUTION AMOUNT"
shall be Five Hundred Thousand ($500,000.00) Dollars if the casualty
occurs during the first (180) calendar months of the Initial Term, which
amount shall be reduced at the beginning of the one hundred ninety third
(193rd) calendar month of the Initial Term, and every twelve (12) months
thereafter, by One Hundred Thousand ($100,000.00) Dollars, until (but
not including) the beginning of the last twelve (12) months of the
Initial Term. The One Hundred Thousand ($100,000.00) Dollars Uninsured
Contribution Amount in effect for the last twelve (12) months of the
Initial Term shall remain throughout any Option Periods.
(iii) Landlord Termination. In the event that any portion of the
Development (including the Building) shall be damaged to such an extent
that Landlord, the Condominium Association or any of Landlord's lenders
shall elect not to restore same, then Landlord shall have the right to
terminate this Lease within ninety (90) days
<PAGE> 40
following the date of the damage or destruction or, if applicable,
within a reasonable time after Landlord shall have been notified of the
Condominium Association's or lender's decision not to restore. Upon such
termination of this Lease, the parties shall be released without further
obligations to the other coincident with the surrender of possession of
the Premises to Landlord, except for items which theretofore accrued and
are then unpaid and any obligations specified in this Lease which are to
survive the termination of this Lease. Subject to the rights of
Landlord's lenders and/or the Condominium Association, Landlord shall
not elect to terminate this Lease unless a material portion of the
Development (i.e., more than twenty five percent (25%)) shall have been
damaged. Landlord agrees that if (1) this Lease is terminated by
Landlord pursuant to this Section 21.1(iii) and Landlord thereafter
reconstructs, restores or repairs the Building or the Premises, (2) at
the time of such casualty Tenant is then operating a Club (including
support facilities) within at least seventy-five percent (75%) of the
Premises, (3) at the time of such casualty no monetary Default (as
defined herein) and/or material Default shall have occurred and be
continuing under this Lease, (4) at the time of such casualty, the
Unexpired Lease Term (as defined herein) is at least five (5) years or
Tenant exercises an Option for an Option Period, regardless of whether
Tenant then would otherwise have the right to exercise same, by
delivering notice to Landlord simultaneously with the delivery to
Landlord of the Tenant Acceptance Notice (as defined herein) subject to
and in accordance with this Section 21.1(iii), (5) within one-hundred
eighty (180) days following the termination of this Lease pursuant to
this Section 21.1 (iii), Tenant shall deliver to Landlord a statement
signed and certified by the chief financial officer of Tenant, if Tenant
is a corporation, by a managing member, if Tenant is a limited liability
company, or by the chief financial officer of a corporate general
partner of Tenant, if Tenant is a partnership (such person, the
"FINANCIAL OFFICER"), to be true and correct disclosing in reasonable
detail the aggregate amount of costs and expenses actually incurred by
Tenant as the result of the cessation of Tenant's business operations in
the Premises and such termination of this Lease (e.g., including,
without limitation, the unrecouped costs and expenses actually incurred
by Tenant in connection with the development of a Club in the Premises
and reimbursement to Tenant's Club members of membership fees) which are
not covered by insurance maintained by Tenant or otherwise reimbursed to
Tenant (collectively, the "TENANT TERMINATION COSTS") and (6) at the
time of the Landlord Offer (as defined herein), Tenant or an Affiliate
of Tenant is then operating a first-class coed athletic club, Landlord
shall not operate a Club in the Premises or offer to lease or accept any
offer to lease the Premises to any party within a period of five (5)
years after such termination of this Lease unless Landlord shall have
first offered in writing (the "LANDLORD OFFER") to lease the Premises to
Tenant on the terms and conditions of this Lease (including, without
limitation, any unexercised Option Periods) for a term equal to the
unexpired portion of the term of this Lease as of such termination date
(the "UNEXPIRED LEASE TERM") calculated as if this Lease had not been
terminated and Tenant shall not have accepted such offer by notice to
Landlord within thirty (30) days after such offer is given to Tenant
(the "TENANT ACCEPTANCE NOTICE"). Notwithstanding the foregoing, in the
event that Tenant exercises its option to lease the Premises pursuant to
this Section 21.1 (iii), Landlord shall have the option, exercisable
within thirty (30) days after Landlord's receipt
<PAGE> 41
of the Tenant Acceptance Notice, to nullify the Tenant Acceptance Notice
by delivering to Tenant notice and paying to Tenant the Tenant
Termination Costs. Upon Tenant's receipt of such nullification notice
and the payment of the Tenant Termination Costs, the Tenant Acceptance
Notice shall be deemed null and void and of no force and effect and
Tenant shall be deemed to have waived and relinquished its right to
lease the Premises and Landlord shall at any and all times thereafter be
entitled to lease all or any portion of the Premises to others at such
rental and upon such terms and conditions as Landlord in its sole
discretion may desire.
21.2 Depository. The "DEPOSITORY" shall be a bank or trust company authorized
to do business in the Boston, Massachusetts, with a net worth of at
least $10,000,000.00 selected by Tenant and approved by Landlord;
provided, however, that if (i) Tenant does not make such a selection
within ten (10) business days after notice and demand by Landlord, then
Landlord may select the Depository and (ii) if Landlord has a lender
whose loan is secured by the Property, then anyone, excluding Landlord
or any Affiliate of Landlord, designated by such lender shall be the
Depository. Subject to Section 21.5 hereof, all property insurance
moneys recovered on account of damage or destruction to the Improvements
shall be applied to the payment of the cost of repairing and replacing
the Improvements. If net available insurance moneys shall be
insufficient to pay the entire cost of such work, then Tenant shall bear
the cost thereof in excess of the net available insurance moneys. Except
for work which is reasonably expected to cost less than $100,000.00
(with respect to which Landlord shall hold the proceeds), the Depository
shall hold insurance proceeds with respect to the Improvements and shall
disburse said proceeds during the course of the work of repair,
reconstruction and restoration in accordance with the provisions set
forth below unless the Depository is Landlord's lender or a designee of
such lender, in which event the provisions of the loan documentation
shall control. The Depository shall not be required to make
disbursements more often than at thirty (30) day intervals. Landlord,
Tenant and the Depository shall reasonably, promptly and in good faith
prepare and execute reasonable and appropriate instructions for
disbursement of the proceeds which shall include a procedure for receipt
of certificates, plans, notices, lien releases and applications for
payment. Notwithstanding anything to the contrary contained herein,
disbursement of such insurance proceeds shall in all events (i) be
subject to such requirements as may be imposed by the Condominium
Association and/or any mortgagee of Landlord and (ii) include a
procedure for a retainage of ten percent (10%) of the cost of the work
from each draw disbursed in connection with such restoration until at
least thirty (30) days after the completion of all work. If, after all
of said work shall be completed in accordance with the terms of this
Lease and all governmental approvals and permits required have been
obtained, there are funds held by the Depository for application to the
cost of such work in excess of the amounts withdrawn, then such funds
(after first applying such funds to the costs and expenses of the
Depository) shall be delivered to Tenant; provided, however, that if the
funds held by the Depository are a result of any insurance carried by
Landlord or Section 21.5 hereof, such funds shall be delivered to
Landlord. The Depository may retain free of trust its reasonable fees
and expenses for acting as such. In the event there are not sufficient
funds held by the Depository to pay its fees and
<PAGE> 42
expenses, Landlord and Tenant shall share equally the fees and expenses
of the Depository.
21.3 No Termination or Rental Abatement. No destruction of or damage to the
Property or any part thereof, whether such destruction or damage be
partial or total or whether such destruction or damage shall have been
covered by insurance or not, shall entitle or permit Tenant to surrender
or terminate this Lease (except as provided in Section 21.1(ii) hereof)
or relieve Tenant from liability to pay in full the rents and other sums
and charges payable by Tenant hereunder (except as provided in Section
21.4 hereof), or from any of its obligations under this Lease. Tenant
hereby waives any rights now or hereafter conferred upon it by statute
or other law to surrender this Lease or to quit or surrender the
Property or any part thereof, or to receive any suspension, diminution,
abatement or reduction of the rent or other sums and charges payable by
Tenant hereunder on account of any such destruction or damage, except as
otherwise expressly provided in this Lease.
21.4 Limited Rental Abatement. Notwithstanding anything to the contrary
contained herein, in the event that the Improvements shall be damaged by
peril which is not covered by insurance required to be maintained
hereunder (or which is otherwise maintained), then, to the extent not
covered by the rent abatement insurance or business interruption
insurance required to be carried by Tenant pursuant to Section 20.1 (iv)
hereof (whether by self insuring or otherwise), Tenant shall be entitled
to abate its obligations to pay Monthly Base Rent and, as applicable,
Common Area Expenses or Operating Expenses, for the period from the date
of such peril until the earlier of (i) the date upon which Tenant opens
for operation of its business, or (ii) the date which is twelve (12)
months after the date of such peril, provided that such twelve (12)
month period shall be reduced to the extent that Tenant does not
diligently seek to repair the damage caused as a result of such peril
and/or re-open the Premises for the operation of its business. From and
after the expiration of such rental abatement, Tenant's obligation to
pay Monthly Base Rent and, as applicable, Common Area Expenses or
Operating Expenses shall once again commence.
21.5 Lender's Prior Rights to Insurance Proceeds. Notwithstanding anything to
the contrary herein, Tenant acknowledges that the rights of any lender
holding a mortgage or deed of trust against the Premises ("SECURED
LENDER") to any insurance proceeds applicable to the Improvements,
except for Tenant's Insurance Share (as defined herein), shall be
superior to the rights of Landlord and Tenant to such proceeds.
"TENANT'S INSURANCE SHARE" is equal to Tenant's "pro rata share" (as
determined in accordance with Section 22.1 hereof) of the insurance
proceeds payable for the damaged Improvements. Landlord agrees to use
commercially reasonable efforts to cause the Secured Lender to make the
insurance proceeds in which the Secured Lender has a prior interest
available to Tenant for reconstruction as contemplated in this Lease.
If, within two hundred seventy (270) days following a casualty, a
Secured Lender has not made such proceeds available for reconstruction,
then at Tenant's election this Lease shall terminate as of said 270th
day, unless Landlord gives notice to Tenant on or before said 270th day
that Landlord is
<PAGE> 43
willing to provide the sums necessary for reconstruction in excess of
any deductibles and Tenant's Insurance Share, in which case this Lease
shall not terminate and Landlord shall deposit such sums with the
Depository and Tenant shall reconstruct the Premises in accordance with
the provisions of this Article 21 hereof. The disbursement of any
insurance proceeds applicable to the Improvements shall be subject to
the control of the Secured Lender notwithstanding anything to the
contrary in Section 21.2 hereof.
22. Eminent Domain.
22.1 Permanent Taking. In case all of the Property (a "TOTAL TAKING"), or
such part thereof as shall substantially interfere with Tenant's use and
occupancy thereof to the extent Tenant cannot operate the Club (a
"SUBSTANTIAL TAKING"), shall be taken for any public or quasi-public
purpose by any lawful power or authority by exercise of the right of
appropriation, condemnation or eminent domain, or sold to prevent, or in
lieu of, such taking, this Lease shall automatically terminate effective
as of the date possession is required to be surrendered to said
authority. In the event the amount of property or the type of estate
taken shall not substantially interfere with the conduct of Tenant's
business (a "PARTIAL TAKING"), Tenant shall restore the Property to
substantially its same condition prior to such Partial Taking and a fair
and equitable allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the part of the Property
of which, Tenant shall be so deprived on account of such taking. Tenant
shall not assert any claim against Landlord for any compensation because
of such taking. In the event of a Total Taking, Substantial Taking or
Partial Taking, any award shall belong to and be paid to Landlord
subject to the rights of any mortgagee of Landlord's interest in the
Premises or the beneficiary of any deed of trust which constitutes an
encumbrance thereon, except that Tenant shall be entitled to any portion
of such award related to (i) Trade Fixtures or Tenant's other equipment
and/or personal property which is taken, (ii) Tenant's moving expenses
and loss of goodwill, (iii) Tenant's "pro-rata share" of the
straight-line (on a 20-year basis) unamortized costs of the Improvements
taken, and (iv) in the case of a Partial Taking only, the amount
required to restore the Property to substantially its same condition
prior to such Partial Taking which shall be held by the Depository for
Landlord and shall be disbursed to Tenant for the purposes of such
restoration upon the same terms and conditions as if they were insurance
proceeds under Article 21 hereof. For the purposes of this Section 22.1,
"pro-rata share" shall be determined by the proportion that the cost
paid by Tenant for the taken Improvements bears to the total of those
costs paid therefor by Landlord and Tenant. Nothing contained in this
Section 22.1 shall be deemed to give Landlord any interest in any award
made to Tenant for the taking of Trade Fixtures or Tenant's other
personal property, fixtures and goodwill and for relocation expenses.
Landlord agrees not to interfere with Tenant's right to participate in
any condemnation proceedings. The provisions of this Section 22.1 shall
survive the termination of this Lease.
22.2 Temporary Taking. In the event of taking of the Property or any part
thereof for temporary use, (i) this Lease shall be and remain unaffected
thereby and rent shall not abate, and (ii) Tenant shall be entitled to
receive for itself such portion or portions of any
<PAGE> 44
award made for such use with respect to the period of the taking which
is within the Term provided that if such taking shall remain in force at
the expiration or earlier termination of this Lease, Tenant shall then
pay to Landlord a sum equal to the reasonable cost of performing
Tenant's obligations under Article 15 hereof with respect to the
surrender of the Property and upon such payment shall be excused from
such obligations. For purpose of this Section 22.2, a temporary taking
shall be defined as a taking for a period of ninety (90) days or less.
22.3 Waiver. Landlord and Tenant each hereby waive any statutory rights of
termination which may arise by reason of a taking.
23. Defaults and Remedies.
23.1 Defaults. The occurrence of any one or more of the following events
shall constitute a default hereunder by Tenant ("DEFAULT"):
(1) The vacation or abandonment of the Premises by Tenant or
failure to continuously operate the Club in accordance with Article 8
hereof where Tenant has failed to cure such vacation, abandonment or
failure to operate within thirty (30) days following notice from
Landlord to Tenant of the need for such cure (the parties agree,
however, that cessation of operations of business from the Premises from
time to time for the purpose of remodeling the Premises or making
alterations, additions or improvements to the Property (collectively
"TEMPORARY CLOSURES") shall not be considered vacation or abandonment of
the Premises provided and on condition that Tenant shall use
commercially reasonable efforts to complete any and all such work, from
time to time, in an expeditious and non-disruptive manner).
(2) The failure by Tenant to make any payment of Rent or any
other payment required to be made by Tenant hereunder (including the
Work Letter), where such failure shall continue for a period of ten (10)
business days following notice from Landlord to Tenant that such payment
is due; provided, however, Tenant shall be entitled to such notice and
opportunity to cure on only two (2) occasions during any Lease Year;
(3) The failure by Tenant to observe or perform any of the
covenants or provisions of this Lease (including the Work Letter) to be
observed or performed by Tenant, other than as specified in Sections
23.1(i) or (ii) hereof, where such failure shall continue for a period
of thirty (30) days after notice thereof from Landlord to Tenant. If the
nature of the Default is such that more than thirty (30) days are
reasonably required for its cure, then Tenant shall not be deemed to be
in Default if Tenant shall commence such cure within said thirty-day
period and thereafter diligently prosecutes such cure to completion,
which completion shall occur not later than one hundred twenty (120)
days from the date of such notice from Landlord;
(4) (a) The making by Tenant of any general assignment for the
benefit of creditors; (b) the filing by or against Tenant of a petition
to have Tenant adjudged a bankrupt or a petition for reorganization or
arrangement under any law
<PAGE> 45
relating to bankruptcy unless, in the case of a petition filed against
Tenant, the same is dismissed within one hundred twenty (120) days; (c)
the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of
Tenant's interest in this Lease, where possession is not restored to
Tenant within one hundred twenty (120) days; or (d) the attachment,
execution or other judicial seizure of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease,
where such seizure is not discharged within 120 days; or
(5) The failure by Tenant to open for business to the general
public within twelve (12) months following Substantial Completion of the
Premises, subject to Force Majeure, within thirty (30) days following
notice from Landlord to Tenant of the need for such cure.
Any notice provided for in this Section 23.1 shall be in
addition to, and not in lieu of, any statutorily required notice regarding
unlawful detainer actions.
In the event that this Lease is terminated by notice as provided
for in Section 23.1(iv) hereof and Tenant shall thereafter seek protection under
the Federal Bankruptcy Laws or any state equivalent, then Tenant if a
debtor-in-possession agrees to consent to any application by Landlord to
terminate the automatic stay provisions of the Federal Bankruptcy Code on the
grounds that there is no equity in this Lease as a result of the pre-petition
termination notice.
23.2 Remedies. In the event of any Default, in addition to any other remedies
available to Landlord at law or in equity, Landlord shall have the
immediate option to terminate this Lease and all rights of Tenant
hereunder. In the event that Landlord shall elect to so terminate this
Lease then Landlord may recover from Tenant:
(1) the worth at the time of award of any unpaid Rent which had
been earned at the time of such termination; plus
(2) the worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves
could have been reasonably avoided; plus
(3) the worth at the time of award of the amount by which the
unpaid Monthly Base Rent for the balance of the Term after the time of
award exceeds the amount of such rental loss that Tenant proves could be
reasonably avoided.
As used in Section 23.2(i) and (ii) hereof, the "worth at the time of
award" is computed by allowing interest at the prime, base or reference rate of
The Chase Manhattan Bank of New York, or its successors, from time to time,
charged to its most favored customers on commercial loans having a 90-day
duration (the "PRIME RATE") plus two percent (2%). As used in Section 23.2(iii)
hereof, the "worth at the time of award" is computed by discounting such amount
by the Prime Rate at the time of award. Notwithstanding anything to the contrary
contained in this Lease, neither Landlord nor Tenant shall be liable for
consequential or punitive
<PAGE> 46
damages which may be suffered by the other as a result of a default by
Landlord or default by Tenant under this Lease.
23.3 Re-entry. In the event of any Default, Landlord shall also have the
right, without demand or notice, without terminating this Lease, to
re-enter the Premises and remove all persons and property from the
Premises, either by summary proceedings or by action at law, without
being deemed guilty of trespass and without prejudice to any remedies
for nonpayment or late payment of any Rent or breach of any covenant.
Such property may be removed and stored in a public warehouse or
elsewhere at the cost of and for the account of Tenant. If Landlord
elects to re-enter the Premises, Landlord may terminate this Lease, or
from time to time, without terminating this Lease, may relet all or any
part of the Premises as agent for Tenant for such term or terms and at
such rental and upon such other terms and conditions as Landlord may
deem advisable, with the right to make alterations and repairs to the
Premises as Landlord, in Landlord's reasonable judgment, considers
advisable and necessary for the purpose of reletting the Premises. No
re-entry or taking possession of the Premises by Landlord pursuant to
this Section 23.3 shall be construed as an election to terminate this
Lease unless notice of such intention is given to Tenant or unless the
termination thereof is decreed by a court of competent jurisdiction.
If Landlord terminates this Lease or re-enters the Premises
pursuant to this Article 23, Tenant shall remain liable (in addition to accrued
liabilities) for: (i) any unpaid Rent due at the time of termination, plus
interest thereon from the due date at the Prime Rate; provided, however, that if
such interest is limited by law to a lesser amount, Landlord shall be entitled
to the maximum amount of interest permitted by law, (ii) subject to clause (v)
of this paragraph, Rent until the date this Lease would have expired had such
termination not occurred; (iii) any and all reasonable expenses (including all
reasonable attorneys' fees, costs and brokerage fees) incurred by Landlord in
re-entering and repossessing the Premises, in making good any Default by Tenant,
in protecting and preserving the Premises by use of watchmen and caretakers and
in reletting the Premises (subject to the provisions of the immediately
preceding paragraph and provided that Tenant shall not be liable for any
expenses incurred by Landlord with respect to alterations which are not
consistent with the use of the Premises as an athletic club and/or a use(s)
complementary to an athletic club); and (iv) any other amount reasonably
necessary to compensate Landlord for any other detriment actually caused
Landlord by Tenant's failure to perform its obligations under this Lease, less
(v) the net proceeds received by Landlord from any reletting prior to the date
this Lease would have expired if it had not been terminated. Tenant agrees to
pay to Landlord the amount so owned above for each month during the Term, at the
beginning of each such month. Any suit brought by Landlord to enforce collection
of such amount for any one month shall not prejudice Landlord's right to enforce
the collection of any such amount for any subsequent month. In addition to the
foregoing, and without regard to whether this Lease has been terminated, Tenant
shall pay to Landlord all costs incurred by Landlord, including reasonable legal
fees and costs, with respect to any lawsuit or action instituted or taken by
Landlord to enforce the provisions of this Lease. Tenant's liability shall
survive the institution of summary proceedings and the issuance of a warrant or
writ thereunder.
<PAGE> 47
If Landlord terminates this Lease, Landlord shall have the right
at any time, at its sole option, to require Tenant to pay to Landlord on demand,
as liquidated and agreed final damages in lieu of Tenant's liability hereunder:
(i) the then present cash value of the Rent, and all other sums which would have
been payable under this Lease from the date of such demand to the date when this
Lease would have expired if it had not been terminated, minus (ii) the fair
market value of the Premises for the same period; provided, however, that if
such damages are limited by law to a lesser amount, Landlord shall be entitled
to prove as liquidated damages the maximum amount permitted by law.
Landlord shall use commercially reasonable efforts to relet the
Premises in the event this Lease is terminated pursuant to the provisions of
this Article 23.
Tenant, on its own behalf and on behalf of all persons claiming
through Tenant, including, but not limited to, all creditors, does hereby waive
any and all rights and privileges, so far as is permitted by law, which Tenant
and all such persons might otherwise have under any present or future law: (i)
to redeem the Premises; (ii) to reenter or repossess the Premises; (iii) to
restore the operation of this Lease, with respect to any dispossession of Tenant
by judgment, warrant or writ of any court or judge, or any re-entry by Landlord,
any expiration or termination of this Lease, whether such dispossession,
re-entry, expiration or termination of this Lease shall be by operation of law
or pursuant to the provisions of this Lease; or (iv) to the service of any
notice of intention to re-enter or notice to quit which may otherwise be
required to be given. The words "disposition," "re-enter", and "re-elected" as
used in this Lease shall not be deemed to be restricted to their technical
meanings.
In the event of any breach or threatened breach by Tenant or any
persons claiming through Tenant of any of the provisions contained in this
Lease, Landlord shall be entitled to enjoin such breach or threatened breach and
shall have the right to invoke any right or remedy allowed at law, in equity, or
otherwise.
23.4 Cumulative Rights. Except as otherwise expressly provided in this Lease,
all rights, options and remedies of Landlord contained in this Lease
shall be construed and held to be cumulative, and no one of them shall
be exclusive of the others, and Landlord shall have the right to pursue
any one or all of such remedies or any other remedy or relief which may
be provided by law, whether or not stated in this Lease. No waiver of
any Default shall be implied from any acceptance by Landlord of any rent
or other payments due hereunder or any omission by Landlord to take any
action on account of such Default if such Default persists or is
repeated, and no express waiver shall affect Defaults other than as
specified in said waiver.
23.5 Waiver of Trial by Jury. Tenant hereby waives all right to trial by jury
in any claim, action, proceeding or counterclaim by Landlord against
Tenant on any matters arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, and/or Tenant's use or
occupancy of the Premises.
24. Assignment and Subletting.
<PAGE> 48
24.1 Landlord's Consent. Except as otherwise expressly provided in the last
sentence of Section 8.1 hereof and in Sections 24.3, 46 and 56 hereof,
Tenant shall not, either voluntarily or by operation of law, assign,
sublet, pledge, encumber, hypothecate or otherwise transfer this Lease,
without the prior consent of Landlord, which consent may be granted or
withheld in Landlord's sole and absolute discretion. Without limiting
the foregoing, it shall be a condition to Landlord's consent hereunder
that the assignee execute, acknowledge and deliver to Landlord an
agreement whereby such assignee agrees to be bound by all of the
covenants and agreements in this Lease which Tenant has agreed to keep,
observe or perform.
24.2 Notice. Subject to the provisions of Articles 46 and 56 hereof, in the
event Tenant desires to assign, sublet, pledge, encumber, hypothecate or
otherwise transfer this Lease, then at least thirty (30) days prior to
the date when Tenant desires the transaction to be effective (the
"ASSIGNMENT DATE"), Tenant shall give Landlord a notice (the "ASSIGNMENT
NOTICE"), which shall set forth the name, address and business of the
proposed assignee or sublessee, information (including references)
concerning the character, ownership, and financial condition of the
proposed assignee or sublessee, the Assignment Date, and any ownership
or commercial relationship between Tenant and the proposed assignee or
sublessee. If Landlord requests additional detail within ten (10) days
after Tenant's initial submission, the Assignment Notice shall not be
deemed to have been received until Landlord receives such additional
detail, and without otherwise limiting the provisions of Section 24.1
hereof, Landlord may withhold consent to any assignment or sublease
until such information is provided to it.
24.3 Ownership Transfers. Except as otherwise expressly provided in this
Section 24.3, any dissolution, merger, consolidation, or other
reorganization of the corporation which constitutes Tenant, or the sale
or other transfer of fifty percent (50%) or more of the corporate stock
of the corporation, or the sale of fifty percent (50%) or more of the
value of the assets of the corporation, shall be deemed an assignment
prohibited by this Article 24 unless Landlord's prior consent is
obtained, which consent shall not be unreasonably withheld or delayed
provided and on condition that: (i) the principal purpose for such
assignment is not the circumventing of the restrictions and limitations
contained in this Article 24; (ii) Tenant shall notify Landlord, in
writing, of any such proposed assignment not less than twenty (20) days
prior to the date on which Tenant proposes to assign its interest in
this Lease; (iii) the assignee shall be reputable and shall have in the
reasonable judgment of Landlord, sufficient financial worth to perform
the obligations of Tenant under this Lease (after consideration of the
then net worth of each Person providing a guaranty or surety of this
Lease to Landlord) as evidenced by the submission to Landlord of
financial and other information regarding the proposed assignee,
including, without limitation, its business experience, a current
financial statement and such other information as Landlord may
reasonably request; (iv) Tenant shall within ten (10) days after an
assignment is executed deliver to Landlord a copy of such assignment;
(v) such assignee shall execute, acknowledge and deliver to Landlord an
agreement, in form and substance reasonably satisfactory to Landlord,
whereby such assignee shall assume the obligations and performance of
this Lease and agree to be
<PAGE> 49
personally bound by and upon all of the terms and conditions of this
Lease on the part of Tenant to be performed or observed; (vi) each
Person providing a guaranty or surety of this Lease to Landlord shall
deliver an agreement in form and substance reasonably satisfactory to
Landlord reaffirming such Person's obligations and liabilities under its
respective agreement, guaranty or surety to Landlord and that such
agreement, guaranty or surety remains binding and enforceable against
such Person in accordance with its terms; (vii) the assignee shall use
and occupy the Premises only for the purposes set forth in this Lease,
and for no other purposes, in compliance with the terms and conditions
of this Lease; (viii) neither such assignment nor the acceptance of rent
by Landlord from such assignee shall, in any way, release, relieve or in
any manner affect the liability of Tenant under this Lease, it being the
agreement and understanding of the parties that assignor shall be and
remain liable under all of the terms and conditions of this Lease; and
(ix) neither such assignment nor the acceptance of rent by Landlord from
such assignee shall, in any way, release, relieve or in any manner
affect the liability of any Person providing a guaranty or surety of
this Lease to Landlord.
Notwithstanding anything to the contrary contained herein, the transfer
of shares of Tenant (if Tenant is a corporation) for purposes of this Section 24
shall not include the sale of shares by persons other than those deemed
"insiders" within the meaning of the Securities Exchange Act of 1934, as
amended, which sale is effected through the "over-the-counter market" or through
any recognized stock exchange.
The term "PERSON" as used in this Lease shall mean any individual,
corporation, partnership, joint venture, limited liability company, limited
liability partnership, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof or any
other form of business or legal association or entity, and the term "CONTROL" as
used in this Section 24.3 shall mean the direction of the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or by law.
24.4 No Release. Any sale, assignment, subletting, hypothecation or transfer
of this Lease that is not in compliance with the provisions of this
Article 24 shall, at Landlord's option, be void. The consent by Landlord
to any assignment or sublease shall not be construed as relieving Tenant
or any assignee of this Lease from any liability or obligation hereunder
whether or not then accrued. This Article 24 shall be fully applicable
to all further sales, hypothecations, transfers, assignments and
sublettings of any portion of the Premises by any successor or assignee
of Tenant.
25. Subordination.
Without the necessity of any additional document being executed by
Tenant for the purpose of effecting a subordination, and at the election of
Landlord or any mortgagee with a lien on the Premises or the Development, or any
portion thereof or any ground lessor with respect to the Premises, this Lease
shall be subject and subordinate at all times to: (i) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Premises, (ii) the lien of any mortgage or deed of trust which may now exist or
hereafter be executed in any amount for which the Premises is specified as
security, and (iii) the Condominium Documents
<PAGE> 50
(as same may now or hereafter exist) and (iv) any CC&R (as may now or hereafter
exist) that do not materially increase Tenant's obligations hereunder nor
materially decrease Tenant's rights hereunder nor materially interfere with the
conduct of Tenant's normal business operations (all of the foregoing,
collectively the "SENIOR INTERESTS" and the holders of the Senior Interests
shall be referred to as "SENIOR INTEREST HOLDERS"). Notwithstanding the
foregoing, Landlord shall have the right to subordinate or cause to be
subordinated any such ground leases or underlying leases or any such liens to
this Lease. In the event that any ground lease or underlying lease terminates
for any reason or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the tenant of the successor in interest to
Landlord. Tenant covenants and agrees to execute and deliver within fifteen (15)
business days after demand by Landlord and in the form requested by Landlord,
any additional documents evidencing the subordination of this Lease with respect
to any such ground leases or underlying leases, the lien of any such mortgage or
deed of trust, the Condominium Documents or the CC&R, and, effective upon a
failure to do so, Tenant hereby irrevocably appoints Landlord as
attorney-in-fact of Tenant to execute, deliver and record any such document in
the name and on behalf of Tenant. In consideration of, and as a condition
precedent to, Tenant's agreement to be bound by the subordination provisions of
this Article 25, Landlord shall provide to Tenant for Tenant's execution, a
commercially reasonable subordination, attornment and nondisturbance agreement
("NON-DISTURBANCE AGREEMENT"), in recordable form, that in any event shall not
provide for any material increase in Tenant's obligations nor any material
decrease in Tenant's rights under this Lease and shall be executed by all future
ground lessors, mortgage holders and deed of trust beneficiaries of any of
Landlord's interest in the Premises desiring to subordinate this Lease to the
ground lease, mortgage or deed of trust, as applicable. In the event Landlord
fails to obtain any Non-Disturbance Agreement, then, as to the mortgage, deed of
trust or ground lease which would have been the subject thereof, this Article 25
shall be void and of no force or effect.
As a condition to the effectiveness of this Lease, for the benefit of
Tenant Landlord shall deliver to Tenant a non-disturbance agreement in form and
substance identical to the specimen annexed hereto as Exhibit D from Fleet Bank,
National Association (the "INITIAL MORTGAGEE NON-DISTURBANCE AGREEMENT") and
such Initial Mortgagee Non-Disturbance Agreement shall be deemed to satisfy the
requirements described in this Article 25. Tenant agrees to execute the Initial
Mortgagee Non-Disturbance Agreement, provided the agreement conforms to the
agreement attached hereto as Exhibit D.
26. Estoppel Certificate.
26.1 Delivery. Within fifteen (15) business days following any request which
Landlord or Tenant may make from time to time, the other party shall
execute and deliver to the requesting party a statement certifying: (i)
the Commencement Date; (ii) the fact that this Lease is unmodified and
in full force and effect (or, if there has been modification hereto,
that this Lease is in full force and effect, and stating the date and
nature of such modification); (iii) the date to which the rental and
other sums payable under this Lease have been paid; (iv) that to the
best of the certifying party's knowledge, there is no current default
under this Lease by either Landlord or Tenant except as
<PAGE> 51
specified in the statement; and (v) such other matters reasonably
requested by the requesting party. Landlord and Tenant intend that any
statement delivered pursuant to this Section 26.1 may be relied upon by
any mortgagee, beneficiary, purchaser or prospective purchaser of the
Premises, the Club or any interest in either, and said statement shall
so state.
26.2 Failure to Deliver. Landlord's or Tenant's failure to deliver any
statement required pursuant to Section 26.1 hereof within such time
shall be conclusive upon such failing party (i) that this Lease is in
full force and effect, without modification except as may be reasonably
represented in good faith by Landlord or Tenant, (ii) that there is no
uncured default in Landlord's or Tenant's performance, and (iii) that
not more than one month's rental has been paid in advance.
26.3 Financial Statements. Within thirty (30) days after Landlord's request,
Tenant shall furnish to Landlord (i) no more often than once per
calendar-quarter, the most current existing audited financial statements
of Tenant (which shall, at a minimum, include a balance sheet and income
statement), and (ii) if at any time Tenant is not a publicly-traded
entity or an Affiliate thereof which files consolidated financial
statements, such other information relating to Tenant's financial
condition as may be reasonably required by Landlord. Landlord shall at
all times maintain the confidentiality of the aforementioned financial
statements which are not available to the general public, except to the
extent reasonably necessary to (a) comply with applicable laws,
regulations, court or administrative orders, or to prosecute or defend
any claim or suit by litigation or otherwise under this Lease and (b)
provided that the recipients of such information agree in writing to
hold the same in confidence, (1) carry out the obligations set forth in
this Lease or documents evidencing and/or securing any Senior Interest,
(2) obtain legal, financial and/or tax advice from Landlord's attorneys,
accountants and financial advisors, (3) negotiate or complete a
transaction with a lender to Landlord secured by Landlord's interest in
the Development, the Building or this Lease (including, without
limitation, a pledge of rents payable hereunder) or purchaser of the
Building or the Development or (4) negotiate or complete a public or
private syndication or similar offering with respect to this Lease,
Landlord, the interests of any of the members of Landlord, the
Development and/or the Building.
27. Construction.
This Lease is to be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts (excluding choice of law provisions).
Whenever the context so requires herein, the neuter gender shall include the
masculine and feminine, and the singular number shall include the plural, and
vice versa. This Lease shall be construed as having been drafted by both
parties, jointly, and not in favor of or against one party or the other. When
used herein, the terms "including," "include," "including, without limitation,"
and similar terms shall be construed as prefacing examples, components or
illustrations rather than exhaustive definitions, unless a contrary intent is
specifically stated, such as "including and expressly limited to," or in
similarly unambiguous terms.
<PAGE> 52
28. Successors and Assigns.
Except as otherwise provided in this Lease, all of the covenants,
conditions and provisions of this Lease shall be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns.
29. Surrender of Premises.
The voluntary or other surrender of this Lease by Tenant, or a mutual
cancellation hereof, shall not work a merger, and shall, at the option of
Landlord, operate as an assignment to it of any or all subleases or
subtenancies. Upon the expiration or earlier termination of this Lease, Tenant
shall surrender the Premises and, subject to the provisions of Article 14
hereof, all alterations and additions thereto, in good order, repair and
condition, reasonable wear and tear excepted.
30. Attorneys' Fees and Costs.
If Landlord should bring suit for possession of the Premises, or if
Landlord or Tenant should bring suit for the recovery of any sum due under this
Lease or because of the breach of any provisions of this Lease, or for any other
relief against the other hereunder, or in the event of any other litigation
between the parties with respect to this Lease, including any action for
declaratory relief filed by Landlord or Tenant, then the prevailing party shall
be entitled to an award of all costs and expenses, including reasonable
attorneys' fees and costs, in addition to all other relief awarded.
31. Performance by Landlord.
If Tenant shall fail to pay any sum of money owed hereunder, or if
Tenant shall fail to perform any other act on its part to be performed
hereunder, and (except in the event of an emergency) such failure shall continue
beyond the cure periods set forth in Section 23.1 hereof, Landlord may, without
waiving or releasing Tenant from the obligations of Tenant, but shall not be
obligated to, make any such payment or perform any such other act to be made or
performed by Tenant. All sums so paid by Landlord and all necessary incidental
costs together with interest thereon at the rate of twelve percent (12%) per
annum, from the date of such payment by Landlord, shall be payable to Landlord
upon demand as Additional Rent.
32. Late Charge and Interest.
Tenant acknowledges that the late payment by Tenant to Landlord of any
sums due under this Lease will cause Landlord to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such costs include processing and accounting charges, and
late charges that may be imposed on Landlord by the terms of any encumbrance or
note secured by any encumbrance covering the Premises. Therefore, if any
installment of Monthly Base Rent or any other sum of money due hereunder is not
timely paid by Tenant and such failure continues for ten (10) days after notice
thereof from Landlord, Tenant shall pay to Landlord, as Additional Rent, the sum
of four percent (4%) of the overdue amount as
<PAGE> 53
a late charge; provided, however, Tenant shall be entitled to such ten (10) day
notice and opportunity to cure on only two (2) occasions during any twelve (12)
month period. To the extent permitted by applicable law, such overdue amount
shall also bear interest commencing upon the due date, as Additional Rent, at
the lesser of the maximum rate than permitted by law and twelve percent (12%)
per annum. Landlord's acceptance of any late charge or interest shall not
constitute a waiver of Tenant's default with respect to the overdue amount or
prevent Landlord from exercising any of the other rights and remedies available
to Landlord under this Lease or any law now or hereafter in effect.
Notwithstanding anything to the contrary contained herein, in no event shall
Tenant be required to pay any amounts that would be characterized as interest
under applicable law in excess of the amounts that could be lawfully charged,
collected and received by Landlord under applicable law. Landlord and Tenant
intend to comply with all usury laws with respect to this Lease.
33. Mortgagee Protection.
In the event of any default on the part of Landlord, Tenant will give
notice by registered or certified mail to any beneficiary of a deed of trust or
mortgage given by Landlord covering the Premises whose address shall have been
furnished to Tenant, and shall offer such beneficiary or mortgagee the same
opportunity to cure Landlord's default as provided to Landlord under Article 49
hereof plus an additional period of sixty (60) days. In addition, in those
instances which reasonably require such beneficiary or mortgagee to be in
possession of, or have title to, the Development (or any portion thereof) to
cure any such default, the time herein allowed to such beneficiary or mortgagee
to cure such default shall be deemed extended to include the period of time
reasonably necessary to obtain such possession or title with due diligence, and
in those instances in which such beneficiary or mortgagee is prohibited by any
process or injunction issued by any court or by reason of any action by any
court having jurisdiction of any bankruptcy or insolvency proceeding involving
Landlord from commencing or prosecuting foreclosure or other appropriate
proceedings in the nature thereof, the time herein allowed such beneficiary or
mortgagee to prosecute such foreclosure or other proceeding shall be extended
for the period of such prohibition.
34. Definition of Landlord.
The term "LANDLORD," as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners, at the time in question, of Landlord's
interest under this Lease. In the event of any transfer, assignment or other
conveyance or transfer of such title, Landlord herein named (and in case of any
subsequent transfer or conveyance, the then grantor) shall (in absence of a
writing hereafter described) be automatically freed and relieved from and after
the date of such transfer, assignment or conveyance of all liability with
respect to the performance of any covenants or obligations on the part of
Landlord contained in this Lease thereafter to be performed, and in absence of
any writing to the contrary, the transferee shall be deemed to have assumed
same. Landlord may transfer its interest in the Premises or this Lease without
the consent of Tenant and such transfer or subsequent transfer shall not be
deemed a violation on Landlord's part of any of the terms or conditions of this
Lease.
<PAGE> 54
35. Waiver.
A waiver of any breach of any term, covenant or condition herein
contained shall not be deemed to be a waiver of any subsequent breach of the
same or any other term, covenant or condition herein contained, nor shall any
custom or practice which may grow up between the parties in the administration
of the terms hereof be deemed a waiver of or in any way affect the right of
Landlord or Tenant to insist upon the performance by Tenant or Landlord,
respectively, in strict accordance with said terms. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent. No acceptance by Landlord of a lesser sum than the Monthly Base Rent and
Additional Rent then due shall be deemed to be other than on account of the
earliest installment of such rent, and Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such installment
or other amount or pursue any other remedy provided in this Lease.
36. Parking.
So long as this Lease remains in full force and effect and Tenant is
operating a Club and facilities related to the operation of such Club in at
least seventy-five percent (75%) of the Premises, Landlord shall make up to 150
parking spaces (individually, a "PARKING SPACE" and collectively, the "PARKING
SPACES") available on a non-exclusive basis, with such Parking Spaces to be
located at the Development, in Landlord's discretion, for daily use during such
times as the Club is open for business, by Tenant and Tenant's members subject
to the terms and provisions of this Article 36. Tenant shall pay to Landlord, as
Additional Rent, within fifteen (15) days after Tenant's receipt of any bill or
statement therefor, an amount equal to $150 per calendar month per Parking
Space, such $150 being subject to increase every five (5) Lease Years during the
Term by the CPI Increase (as defined herein); provided, however, that
notwithstanding the foregoing, each such CPI Increase shall not exceed twelve
percent (12%) (the "PARKING CHARGE").
Provided Tenant is not in default beyond the expiration of applicable
notice or cure periods under any of the terms, provisions and conditions of this
Lease, Tenant shall have the option to use up to an additional 200 parking
spaces subject to and in accordance with the terms and provisions of this
paragraph, with such parking spaces to be located at the Development, in
Landlord's discretion, by giving irrevocable written notice (the "ADDITIONAL
PARKING SPACE NOTICE") to Landlord not later than six (6) months after the date
upon which Tenant commences normal business operations from the Premises with
the general public. If Tenant gives the Additional Parking Space Notice to
Landlord pursuant to the immediately preceding sentence, then, subject to the
terms and provisions of this Article 36, (i) so long as this Lease remains in
full force and effect and Tenant is operating a Club and facilities related to
the operation of such Club in at least seventy-five percent (75%) of the
Premises, Landlord shall make the number of parking spaces indicated in the
Additional Parking Space Notice (not to exceed 200 parking
<PAGE> 55
spaces in the aggregate) available on a non-exclusive basis for daily use during
such times as the Club is open for business, by Tenant and Tenant's members and
(ii) Tenant shall pay to Landlord, as Additional Rent in accordance with the
immediately preceding paragraph, the Parking Charge with respect to each such
additional parking space.
In addition to the foregoing, Tenant and Tenant's members may use in
connection with the Club the parking spaces located at the Development which are
designated as general public parking spaces if and to the extent available on a
"first come, first serve" basis. The foregoing shall not be deemed to be a
representation that the aforementioned general public parking spaces shall be
available for use by Tenant and Tenant's members. Landlord shall charge Tenant
an amount equal to the then market rate for such spaces, with the market rate
for such spaces to be based on the market rate for similarly located parking
spaces in the vicinity of the Building (as reasonably determined by Landlord).
If and to the extent any of the aforementioned parking spaces are valet
or attendant parking for the general public, Landlord shall provide any such
valet or attendant parking to Tenant's members at the rate of $1.75 per vehicle
(such $1.75 being in addition to the Parking Charge with respect to any such
parking spaces and being subject to increase each Lease Year by the CPI
Increase). Notwithstanding anything to the contrary contained herein, if the
delivery times in any calendar month of the vehicles of Tenant's members parked
in any such valet or attendant parking spaces exceed four (4) minutes more than
80% of the time during any such calendar month, then, Tenant, without
limitation, shall have the right, but not the obligation, to cease the use of,
and Landlord shall cease to have the obligation to furnish, any or all of such
valet or attendant parking spaces by giving prior written notice, together with
documentation reasonably evidencing such delivery times, to Landlord within
fifteen (15) days after the end of such calendar month. If Tenant shall deliver
such notice and documentation, then the right of Tenant to use, and the
obligation of Landlord to furnish, the number of valet or attendant parking
spaces set forth in such notice to Landlord shall end as of the last day of the
calendar month in which Landlord shall receive such notice and documentation, it
being understood and agreed that notwithstanding the foregoing the terms and
provisions of this Lease shall continue in full force and effect in accordance
with their terms.
The term "CPI" shall mean the Consumer Price Index for all Urban
Consumers published by the Bureau of Labor Statistics of the United States
Department of Labor for the Boston Metropolitan Area, All Items (1982-84=100),
or a successor or substitute index reasonably selected by Landlord appropriately
adjusted to reflect a constant base year. In the event that the CPI ceases to
use 1982-84=100 as the basis of calculation, or if a substantial change is made
in the terms or number of items contained in the CPI, then the CPI shall be
adjusted to the figure that would have been arrived at had the manner of
computing the CPI not been altered. In the event such CPI (or a successor or
substitute index) is no longer published, a reliable governmental or other
non-partisan publication evaluating the information theretofore used in
determining the CPI shall be used. No adjustments or recomputations, retroactive
or otherwise, shall be made due to a revision which may later be made in the
first published figure of the CPI for any month. Whenever any provision hereof
provides that an amount shall be adjusted by the CPI Increase, then such amount
shall be multiplied by a fraction, the numerator of which shall be
<PAGE> 56
the CPI for the calendar month immediately preceding the Lease Year for which
the amount is to be determined and the denominator of which shall be the CPI for
the calendar month during which the Commencement Date has occurred.
37. CC&R.
Tenant shall faithfully observe and comply with the Condominium
Documents, and all reasonable and nondiscriminatory rules and regulations
Landlord shall adopt for the Development (as the same may be changed from time
to time) and the CC&R. Landlord shall not be responsible to Tenant for the
violation or nonperformance by any other tenant or occupant of the Development
of the Condominium Documents (if applicable), any of said rules and regulations
or the CC&R. Landlord agrees that future amendments to the CC&R and any such
rules and regulations shall not materially interfere with or interrupt Tenant's
ability to operate a first-class Club in accordance with the terms and
provisions of this Lease and shall not materially increase Tenant's obligations
hereunder nor materially decrease Tenant's rights hereunder, nor be enforced as
to Tenant discriminatorily.
38. Headings.
The Article and Section headings of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part hereof.
39. Examination of Lease.
Submission of this instrument for examination or signature by Landlord
or Tenant does not constitute a reservation of or option for lease, and it is
not effective as a lease or otherwise until execution by and delivery to both
Landlord and Tenant.
40. Intentionally Omitted.
41. Prior Agreement; Amendments.
This Lease, together with the addenda and exhibits attached hereto,
contains all of the agreements of the parties hereto with respect to any matter
covered or mentioned in this Lease, and no prior agreement or understanding
pertaining to any such matter shall be effective for any purpose. No provision
of this Lease may be amended or added to except by an agreement in writing
signed by the parties hereto or their respective successors in interest (subject
to the consent requirement in Article 24 hereof). The parties acknowledge that
all prior agreements, representations and negotiations are deemed superseded by
this Lease to the extent they are not incorporated herein.
42. Severability.
Any provision of this Lease which shall prove to be invalid, void or
illegal in no way affects, impairs or invalidates any other provision hereof,
and such other provisions shall remain in full force and effect.
<PAGE> 57
43. Limitation on Liability.
It is expressly understood and agreed that any money judgment against
Landlord resulting from any default or other claim arising under this Lease
shall be satisfied only out of Landlord's interest in (i) the Premises, if the
Premises shall then be subject to a condominium form of ownership or (ii) the
Development, if the Premises shall not then be subject to a condominium form of
ownership. No other real, personal or mixed property of Landlord, wherever
situated, shall be subject to levy on any such judgment obtained against
Landlord. If Landlord's interest in the Premises or Development, as applicable,
is insufficient for the payment of such judgment, Tenant shall not institute any
further action, suit, claim or demand, in law or in equity, against Landlord for
or on the account of such deficiency. Tenant hereby waives, to the fullest
extent waivable under law, any right to satisfy said money judgment against
Landlord except from Landlord's interest in the Development or Premises, as
applicable, and except as otherwise provided above.
44. Riders.
Clauses, plats, exhibits, addenda and riders, if any, affixed to this
Lease are a part hereof.
45. Modification for Lender.
If, in connection with obtaining construction, interim or permanent
financing for the Premises or the Development, or any part thereof, or consent
of Landlord's existing or potential lenders to the terms of the transactions
contemplated pursuant to this Lease, a lender shall request reasonable
modifications in this Lease as a condition to such financing or the granting of
its consent, Tenant will not unreasonably withhold, delay or defer its consent
thereto, provided that such modifications do not materially increase the
obligations of Tenant hereunder, materially decrease Tenant's rights hereunder
or materially adversely affect the leasehold interest hereby created. If, in
connection with obtaining financing for Tenant's Trade Fixtures subject to and
in accordance with Section 1.2 hereof, tenant's lender shall request reasonable
modifications to this Lease, Landlord agrees to make reasonable nonmaterial
modifications to this Lease and further agrees not to unreasonably withhold,
delay or defer its consent with respect to such modifications provided such
modifications do not decrease the monetary obligations of Tenant hereunder or
materially affect Landlord's rights hereunder; provided, however, that Landlord
shall have no obligation to agree to any such modifications unless such
modifications are approved by the Senior Interest Holders.
46. Security Agreements/Leasehold Mortgages.
46.1 Tenant covenants and agrees that Tenant shall not, except as set forth
in Sections 56.1 and 56.2 hereof, encumber or place or permit to be
placed any mortgages or other encumbrances on the leasehold interest
granted hereunder and that no security agreement, whether by way of
conditional bill of sale, chattel mortgage or instrument of similar
import, shall be placed upon any improvement made by Tenant which is
affixed to the realty.
<PAGE> 58
46.2 In the event that any of the machinery, fixtures, furniture and
equipment installed by Tenant in the Premises are purchased or acquired
by Tenant subject to a chattel mortgage, conditional sale agreement or
other title retention or security agreement, Tenant undertakes and
agrees that no such chattel mortgage, conditional sale agreement or
other title retention or security agreement or Uniform Commercial Code
("UCC") filing statement shall be permitted to be filed as a lien
against the Building and real property of which the Premises form a part
and to cause to be inserted in any of the above described title
retention, chattel mortgage, security agreements, conditional sale
agreement or UCC filing statement the following provision:
"NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, THIS CHATTEL
MORTGAGE, CONDITIONAL SALE AGREEMENT, TITLE RETENTION AGREEMENT,
SECURITY AGREEMENT OR UCC FILING STATEMENT SHALL NOT CREATE OR
BE FILED AS A LIEN AGAINST THE LAND, BUILDING AND IMPROVEMENTS
COMPRISING THE REAL PROPERTY IN WHICH THE GOODS, MACHINERY,
EQUIPMENT, APPLIANCES OR OTHER PERSONAL PROPERTY COVERED HEREBY
ARE TO BE LOCATED OR INSTALLED."
46.3 In addition to any other rights that Landlord may have by reason of
Tenant's failure to comply herewith, if any such leasehold mortgage or
other encumbrance, lien or UCC filing statement, based on an agreement
as above described, is filed as an encumbrance, as applicable, against
the Building or improvements of which the Premises form a part, the
Premises and/or any interest thereon, Tenant shall, within thirty (30)
days following notice thereof from Landlord, cause such leasehold
mortgage or other encumbrance, lien or filing statement to be removed or
discharged at Tenant's own cost and expense, and Tenant's failure to do
so shall constitute a breach of a material provision of this Lease.
47. Authorizations.
Each individual executing this Lease on behalf of Landlord or Tenant
represents and warrants that he or she is duly authorized to execute and deliver
this Lease on behalf of Landlord or Tenant, respectively, in accordance with the
provisions of duly adopted corporate resolutions, and that this Lease has been
duly and properly executed and delivered by Landlord or Tenant, respectively.
48. Signage.
Tenant agrees that any and all exterior building signs on the Premises
shall be subject to the approval of Landlord (and if applicable the Condominium
Association) with respect to the graphics, materials, color, design, lettering,
language, lighting, specifications and exact location ("SIGNAGE APPROVAL
FACTORS") and shall be subject to the approval of the applicable governmental
authorities having jurisdiction, including, without limitation, the BRA and the
City of Boston Public Improvement Commission. Tenant shall obtain, and shall
furnish Landlord with copies of, any and all necessary approvals and/or permits
of governmental authorities having jurisdiction, including, without limitation,
BRA and the City of Boston Public Improvement Commission with respect to such
signs and Tenant shall maintain all such
<PAGE> 59
approvals and/or permits in good standing throughout the Term. All signage shall
be of a size not in excess of that permitted by applicable law and shall
otherwise comply with applicable laws, regulations, permits, approvals,
ordinances, the Condominium Documents and CC&R; provided, however, that no
change in the CC&R shall require Tenant to modify its original (or, if
theretofore modified, its then-existing,) exterior signs. At the expiration or
earlier termination of this Lease, Tenant shall, at Tenant's sole cost and
expense, cause all such signage to be removed from the exterior of the
Improvements and shall cause the exterior of the Improvements to be restored to
the condition existing prior to the placement of such signage. If Tenant fails
to remove such signs and restore the exterior of the Improvements by the
expiration or earlier termination of this Lease, then Landlord may perform such
work, and all costs and expenses incurred by Landlord in so performing shall be
reimbursed by Tenant to Landlord within ten (10) days after Tenant's receipt of
an invoice therefor. In addition to the foregoing, at all times Tenant shall be
entitled to erect and maintain, as needed in Tenant's judgment but subject to
Landlord's approval, throughout the Development, appropriate directional signage
with respect to Tenant's parking. Notwithstanding anything to the contrary
contained in this Lease, in connection with Tenant seeking to obtain any
approvals and/or permits from the BRA for such signs, Tenant shall furnish
Landlord with copies of all notices and documents submitted to the BRA so that
Landlord may be kept fully informed in respect thereof, Landlord may, at its
election, reasonably participate in the same and at the election of Landlord,
Tenant shall retain, at Tenant's sole cost and expense, a Person designated by
Landlord and approved by Tenant to obtain any such approvals and/or permits from
the BRA, provided that any such designation shall not cause a delay (in more
than a de minimis manner) in the obtaining of any such approvals and/or permits
by Tenant, it being understood and agreed that Landlord shall not be liable to
Tenant in connection with such participation of Landlord and the retaining of
such Person by Tenant in connection with the obtaining of any such approvals
and/or permits.
49. Default by Landlord.
Landlord shall not be in default hereunder unless Landlord fails to
perform the obligations required of Landlord within a reasonable time, but in no
event later than thirty (30) days after notice by Tenant to Landlord and to the
holder of any first mortgage or deed of trust covering the Premises whose name
and address have been furnished in writing to Tenant ("NOTICED LENDER"),
specifying wherein Landlord has failed to perform such obligation; provided,
however, that if the nature of Landlord's obligation is such that more than
thirty (30) days are required for performance, then Landlord shall not be in
default if Landlord commences performance within such thirty (30) day period and
thereafter diligently prosecutes the same to completion (the "CURE PERIOD"). In
addition, the Noticed Lender shall be entitled to such additional period of time
to cure any such default as is set forth in Section 33 hereof. Notwithstanding
anything in this Lease to the contrary, if access to the Premises is unavailable
as a result of any blockage occurring in the Common Areas that is caused by
Landlord or its agents, Tenant shall have the right to give Landlord and any
Noticed Lender notice of such events (an "ABATEMENT NOTICE"). If the blockage in
the Common Areas which denies access to the Premises has not been repaired
within the Cure Period or such additional period of time for the Noticed Lender
to cure any such default as is set forth in Section 33 hereof (not to exceed
thirty (30) days after the Cure Period), Tenant's obligations to pay Monthly
Base Rent and Common
<PAGE> 60
Area Expenses (or if applicable, Operating Expenses) shall be abated for the
period after the Abatement Notice until the cure of the condition giving rise to
such notice for the entire amount of Monthly Base Rent and Common Area Expenses
(or if applicable, Operating Expenses), provided (i) the condition giving rise
to such abatement right is a denial of access to the Premises due to a blockage
of the Common Areas that is caused by Landlord or its agents and (ii) Tenant is
actually unable to and actually does not use any of the Premises for the conduct
of its business. In the event that for a period of ninety (90) consecutive days
following the Abatement Notice, the condition giving rise to such notice has not
been cured and Tenant has not conducted its business from the Premises during
such ninety (90) day period, Tenant shall have the right to deliver an
additional notice (a "TERMINATION NOTICE") to Landlord and the Noticed Lender
specifying that such item has not been cured within such period and if such
condition is not then cured within thirty (30) business days after the
Termination Notice, Tenant may terminate this Lease by giving notice thereof to
Landlord and the Noticed Lender prior to the date upon which such condition is
cured. The foregoing rights and remedies are in addition to all other rights and
remedies available to Tenant at law or in equity. Except as provided in this
Article 49, Tenant shall not have the right to terminate this Lease as a result
of Landlord's default hereunder. Landlord's liability hereunder in the event of
a default shall be limited as set forth in Article 43 hereof. Notwithstanding
anything to the contrary contained herein, if the blockage occurring in the
Common Areas is the result of a fire or other casualty or a taking in eminent
domain, then this Article 49 shall be inapplicable and Articles 21 and 22 hereof
shall govern the rights of the parties.
50. Reasonable Consents.
Except for any matter which has a material impact on the exterior
appearance of the Improvements or except as otherwise provided herein, any time
the consent, approval, determination, designation, or other discretionary
judgment is required of Landlord or Tenant under this Lease, such consent,
approval, determination, designation, or other discretionary judgment shall not
be unreasonably delayed, withheld, conditioned, exercised or decided,
notwithstanding the presence in some instances of words to that effect and their
absence in other instances.
51. No Recording.
It is expressly agreed that Tenant may not and shall not record this
Lease or any memorandum hereof, except as otherwise expressly provided in this
Lease. Tenant and Landlord shall execute and deliver a statutory form of
memorandum of this Lease for the purpose of recording, but said memorandum of
this Lease shall not in any circumstances be deemed to modify or to change any
of the provisions of this Lease. Upon the expiration or sooner termination of
this Lease, Tenant covenants that it will, at the request of Landlord, execute,
acknowledge and deliver an instrument canceling any memorandum of lease which is
recorded and all other documentation to record same.
52. Force Majeure.
<PAGE> 61
The occurrence of any of the following events shall be referred to
herein as "FORCE MAJEURE" and shall excuse such obligations of Landlord or
Tenant as are thereby rendered impossible or reasonably impracticable for so
long as such event continues: strikes; lockouts; labor disputes; acts of God;
inability to obtain labor, materials or reasonable substitutes therefor;
governmental restrictions, regulations or controls; judicial orders; enemy or
hostile governmental action; civil commotion; fire or other casualty; and other
causes beyond the reasonable control of the party obligated to perform
(excluding financial inability). Notwithstanding the foregoing, the occurrence
of such events shall not excuse Tenant's obligations to pay Monthly Base Rent,
Common Area Expenses or any other sums hereunder (but may delay the commencement
of such obligations to the limited extent expressly provided for in Section 2.1
hereof) or excuse such obligations as this Lease may otherwise impose on the
party to obey, remedy or avoid such event.
53. Guaranty.
Currently with the execution hereof by Tenant and as a condition to the
effectiveness of this Lease, Tenant shall cause The Sports Club Company to
execute and deliver to Landlord a guaranty of this Lease in the form and
substance set forth in Exhibit E attached hereto which is acceptable to
Landlord.
54. Condition Precedent.
Landlord and Tenant shall each have the right to terminate this Lease on
thirty (30) days notice to the other party (without penalty) if Landlord shall
not have closed upon financing for the construction of the portions of the
Development to be performed by Landlord (all such approvals and terms with
respect thereto to be acceptable to Landlord in its sole and absolute
discretion) not later than December 31, 1999 ("DEADLINE DATE"). In the event
that Tenant shall serve a termination notice pursuant to this Article 54 and
Landlord shall secure the necessary financing within the aforesaid thirty (30)
day period or Landlord shall fund such construction without the required
financing (it being expressly agreed that Landlord shall have no obligation
whatsoever to do so), then Tenant's termination notice shall be of no force and
effect. In the event Landlord or Tenant shall terminate this Lease, as
aforesaid, neither party shall have any further rights or obligations hereunder.
55. Communication Equipment and Antenna.
55.1 In the event Landlord shall make a communications antenna or satellite
dish located on the roof of the Building (generically, the "ANTENNA")
available for the non-exclusive and general use of the tenants and
occupants of the Building, then, in such event, Tenant may use the
antenna in connection with the conduct of Tenant's normal business
operations in the Premises provided and on condition that: (a) Tenant's
use of the antenna shall be subject to Landlord's reasonable approval,
(b) Tenant shall pay to Landlord the monthly Building charge for the use
of the antenna as established by Landlord from time to time within
thirty (30) days after receipt of an invoice with respect thereto, (c)
Tenant shall, at its sole cost and expense, install all necessary lines,
<PAGE> 62
risers, conduits and cables from the antenna to the Premises required
for Tenant's use thereof (collectively, the "TENANT INSTALLATION"), (d)
the Tenant Installation is performed in accordance with all legal
requirements and in compliance with the terms and conditions of this
Lease; (e) Tenant shall indemnify and hold Landlord harmless from any
liability, cost or expense (including reasonable attorneys' fees and
costs and disbursements) connected with or arising from the Tenant
Installation of any nature whatsoever, unless such liability, cost or
expense results solely from the acts or omissions of Landlord, or its
agents, servants or employees; (f) Tenant shall promptly repair any
damage caused to the roof of the Building or any other portion of the
Building by reason of the Tenant Installation including, without
limitation, any repairs, restorations, maintenance, renewals or
replacement of the roof of the Building necessitated by or in any way
caused by or relating to the Tenant Installation; and (g) Tenant shall
remove the Tenant Installation and repair any resulting damage to the
Building and restore the portion of the roof of the Building and the
Building affected by the Tenant Installation to the condition which
existed prior to the Tenant Installation, reasonable wear and tear and
damage by casualty excepted, all at or prior to the expiration of the
term of this Lease, at Tenant's sole cost and expense.
55.2 The antenna is for the sole use of Tenant in the conduct of Tenant's
business and for no other purpose or by any other parties. Tenant shall
not resell in any form the use, or rights to the use, of the antenna
including the granting of any license or other rights. The rights
granted in this Article 55 are given in connection with, and as part of
the rights created under, this Lease and are not separately transferable
or assignable other than in connection with an assignment or subletting
permitted by this Lease.
56. Mortgages of Tenant's Interest.
56.1 (a) Subject to the limitations of this Article 56, Tenant shall have the
right to mortgage and pledge its interest in and to this Lease after the
Commencement Date, provided and on condition that any such mortgage,
pledge or other similar lien instrument (a "LEASEHOLD MORTGAGE") shall
be given to an Authorized Institution (as herein defined and an
Authorized Institution holding a Leasehold Mortgage shall hereunder be
referred to as an "AUTHORIZED HOLDER"). Any such Leasehold Mortgage
shall be subject and subordinate to the rights of Landlord hereunder and
the Senior Interest Holders. Landlord shall not be obligated to
recognize a holder of any Leasehold Mortgage, nor shall any such holder
be entitled to any of the rights granted to an Authorized Holder in this
Article, unless such holder shall be an Authorized Institution.
(b) No Authorized Holder of a Leasehold Mortgage on this Lease
shall have the rights or benefits mentioned in this Article 56, nor
shall the provisions of this Article be binding upon Landlord, unless
and until an executed counterpart of such Leasehold Mortgage or a copy
certified by the Authorized Holder or by the recording officer to be
true, shall have been delivered to Landlord, together with a certified
copy of all other ancillary or security documents (collectively,
"LEASEHOLD FINANCING DOCUMENTS"). Within fifteen (15) business days
after request by Tenant, Landlord shall provide to any
<PAGE> 63
proposed holder of a Leasehold Mortgage a statement as to whether such
proposed holder is an Authorized Holder and whether or not any notice of
default under this Lease has been delivered to Tenant. Except as
otherwise set forth in such statement, such statement shall stop
Landlord from asserting that such holder is not an Authorized Holder,
but shall create no liability on Landlord, and, if the same states that
such proposed holder is not an Authorized Holder, shall set forth the
reasons therefor in reasonable detail. In no event, however, shall any
failure by Tenant or other party to comply with the terms of any such
Leasehold Mortgage, including, without limitation, the use of any
proceeds of any debt, the repayment of which is secured by such
Leasehold Mortgage, be deemed to invalidate the lien of such Leasehold
Mortgage.
(c) Tenant and/or the Authorized Holder of such Leasehold
Mortgage shall send to Landlord an executed counterpart of any
amendment, modification or extension of such Leasehold Mortgage or any
other Leasehold Financing Documents promptly after the same are
executed.
56.2 If Tenant shall mortgage this Lease in compliance with the provisions of
this Article 56, then so long as any such Leasehold Mortgage shall
remain unsatisfied of record, the following provisions shall apply:
(1) Landlord, upon serving Tenant with any notice of
default pursuant to the provisions of Article 23 hereof, shall
also serve a copy of such notice upon the Authorized Holder at
the address provided for in Section 56.2(e) hereof, and as to
such Authorized Holder only, no notice by Landlord to Tenant
hereunder shall be deemed to have been duly given unless and
until a copy thereof has been so served.
(2) Any Authorized Holder, in case Tenant shall be in
default hereunder, shall, within the period set forth herein to
cure such default and otherwise as herein provided, have the
right to remedy such default, or cause the same to be remedied,
and Landlord shall accept such performance by or at the instance
of such Authorized Holder as if the same had been made by
Tenant.
(3) Anything herein contained to the contrary
notwithstanding, upon the occurrence of a Default, Landlord
shall take no action to effect a termination of this Lease
without first giving to the Authorized Holder at the address
provided for in Section 56.2(e) hereof written notice thereof
and, as to such Authorized Holder only, (x) with respect to any
Default which can be cured by payment of money, five (5)
business days thereafter within which to cure any such monetary
Default; provided, however, that such Authorized Holder shall,
within such five (5) business day period, deliver to Landlord a
valid, legal and binding written understanding by such
Authorized Holder to indemnify, defend and hold harmless
Landlord and the Condominium Association (if applicable) from
and against all Claims actually or allegedly arising from or in
connection with such Default and Landlord's forbearing from
terminating this Lease; and (y) with respect to such other
Defaults (individually and collectively, "NON-
<PAGE> 64
MONETARY DEFAULTS"), a reasonable time thereafter within which
either to obtain possession of the Leasehold Mortgaged property
(including possession by a receiver) or to institute, prosecute
and complete foreclosure proceedings or otherwise acquire
Tenant's interest under this Lease with diligence; provided,
however, that such Authorized Holder shall, within thirty (30)
days following any such Non-Monetary Default, deliver to
Landlord a valid, legal and binding written undertaking by such
Authorized Holder to cure such default subject to and in
accordance with the applicable provisions of the balance of this
Article 56, to pay to Landlord all Rent then due and owing to
Landlord from Tenant and to indemnify, defend and hold harmless
Landlord and the Condominium Association (if applicable) from
and against all Claims actually or allegedly arising from or in
connection with such Default and Landlord's forbearing from
terminating this Lease; provided, further, however, that:
(2) such forbearance shall not subject Landlord to criminal
prosecution or subject all or any portion of the Development to lien or
sale (without limiting the application of the above Landlord shall be
deemed subject to prosecution for a crime if Landlord, or its managing
agent, if any, or any officer, director, partner, shareholder or
employee of Landlord or its managing agent as an individual, is charged
with a crime of any kind or degree whatsoever, whether by summons or
otherwise);
(3) such forbearance shall not be in breach of any covenant,
representation or warranty of any Senior Interest;
(4) such Authorized Holder shall promptly, diligently and
continuously prosecute the cure of such event of default; and
(5) such Authorized Holder upon obtaining possession or
acquiring Tenant's interest under this Lease, shall be required promptly
to cure all defaults then susceptible of being cured prior to the
expiration of the applicable notice and grace periods expressly provided
for in this Lease which periods shall not commence to elapse until the
date on which such Authorized Holder shall obtain possession or acquire
Tenant's interest under this Lease; provided, however, that: (1) such
Authorized Holder shall not be obligated to continue such possession or
to continue such foreclosure proceedings after any such default shall
have been cured; (2) nothing herein contained shall preclude Landlord,
subject to the provisions of this Article 56, from exercising any rights
or remedies under this Lease with respect to the occurrence of any other
event of default during the pendency of any foreclosure proceedings; (3)
such Authorized Holder shall agree with Landlord in writing made within
twenty (20) days after request therefor by Landlord (given after the
occurrence of a Default), to comply during the period of such
forbearance with such of the agreements, terms, conditions and covenants
of this Lease as are susceptible of being complied with by such
Authorized Holder (it being agreed that any agreement, term, condition
or covenant that can be performed or cured solely by payment of money
shall be susceptible of being complied with by such Authorized Holder);
and (4) any default by Tenant not susceptible of being cured by such
Authorized Holder shall be deemed to have been waived by Landlord upon
such
<PAGE> 65
possession or acquisition of Tenant's interest in this Lease by such
Authorized Holder. It is understood and agreed that such Authorized
Holder, or its designee, or any purchaser in foreclosure proceedings
(including, without limitation, a corporation formed by such Authorized
Holder) may become the legal owner of this Lease through any foreclosure
proceedings or by assignment of this Lease in lieu of foreclosure;
provided, however, that such legal owner shall (A) comply with the
applicable provisions of this Article 56 and (B) within thirty (30) days
after obtaining possession of or acquiring Tenant's interest under this
Lease or acquiring control of Tenant's interest under this Lease
(provided that the mere appointment of a receiver shall not be deemed to
place such Authorized Holder in control unless such Authorized Holder
has the ability to direct the appointment of a Qualified Manager) (aa)
at all times retain a manager or operator ("QUALIFIED MANAGER") for the
Premises which has demonstrated experience and expertise in the
operation of sports fitness clubs consistent with the operations
required of Tenant under this Lease (which obligation to retain a
Qualified Manager shall be a continuous and ongoing obligation of any
such entity holding Tenant's interest hereunder) and shall have notified
Landlord of such Qualified Manager and delivered reasonable
documentation as to the experience and expertise of such Qualified
Manager to Landlord, or (bb) assign Tenant's interests in this Lease in
accordance with the terms and conditions of Article 24 hereof. If a
dispute arises with respect to the experience and/or expertise of a
Qualified Manager which dispute is not resolved within ten (10) days
after notice thereof to the other party, either party may by notice to
the other submit the dispute to arbitration in accordance with Section
7.3 hereof.
(d) In the event of the termination of this Lease prior
to the expiration of the term of this Lease, whether by summary
proceedings to dispossess, service of notice to terminate, or
otherwise, due to an event of default, Landlord shall serve upon
the Authorized Holder at the address provided for in Section
56(e) hereof written notice that this Lease has been terminated
together with a statement of any and all sums which would at
that time be due under this Lease but for such termination, and
of all other events of default, if any, under this Lease then
known to Landlord. Such Authorized Holder shall thereupon have
the option to obtain a new lease in accordance with and upon the
following terms and conditions:
Upon the written request of such Authorized Holder given within
thirty (30) days after service of such notice from Landlord that
this Lease has been terminated, Landlord shall enter into a new
lease of the Premises with such Authorized Holder, or its
designee, as follows:
Such new lease shall be entered into at the cost
(including, without limitation, reasonable attorneys'
fees, disbursements and expenses and any real estate
transfer or transfer gains taxes imposed, primarily or
secondarily, on Landlord by reason of such termination
and/or the granting of such new
<PAGE> 66
lease) of the tenant thereunder, shall be effective as
of the date of the termination of this Lease, and shall
be for the remainder of the term of this Lease and at
the rent and upon all the agreements, terms, covenants
and conditions contained in this Lease, including any
applicable rights of the lease extension. Such new lease
shall require the tenant to perform any unfulfilled
obligation of Tenant under this Lease which is
susceptible of being performed by such tenant,
including, without limitation, curing any default which
can be cured by the payment of a sum of money. To the
extent that Landlord's Work shall have theretofore been
completed, Landlord shall have no further liability with
respect to the initial construction of Landlord Work's.
Such new lease shall provide that there shall be no
liability on the part of Landlord for any holdover by
Tenant. Upon the execution of such new lease, the tenant
named therein shall pay any and all sums which would at
the time of the execution thereof be due under this
Lease but for such termination and shall pay all
expenses, including (i) reasonable attorneys' fees,
court costs and disbursements and expenses and any real
estate transfer or transfer gains taxes imposed,
primarily or secondarily, on Landlord by reason of such
termination and/or the granting of such new lease and
(ii) any costs and expenses incurred by Landlord in
connection with such default and termination, the
recovery of possession of the Premises, and the
preparation, execution and delivery of such new lease.
(e) Any notice or other communication which Landlord
shall desire or is required to give to or serve upon any
Authorized Holder shall be in writing and shall be served by
certified mail, addressed to such Authorized Holder at its
address as set forth in such Leasehold Mortgage, or in the last
assignment thereof delivered to Landlord pursuant to Article 9
hereof or at such other address as shall be designated by such
Authorized Holder by notice in writing given to Landlord by
certified mail.
(f) Any notice or other communication which any
Authorized Holder shall desire or is required to give to or
serve upon Landlord shall be deemed to have been duly given or
served if sent by certified mail addressed to Landlord at
Landlord's addresses as set forth in Article 9 hereof or at such
other addresses
<PAGE> 67
(including without limitation to Senior Interest Holders
designated by Landlord) as shall be designated by Landlord by
notice in writing given to such Authorized Holder by certified
mail.
(g) Each such notice and communication provided for
under this Section 56.2 shall be governed by the provisions of
Article 9 hereof.
56.3 If any Authorized Holder or its designee shall obtain possession of or
acquire title to Tenant's interest in this Lease, by foreclosure of the
Leasehold Mortgage or by assignment in lieu of foreclosure or by an
assignment to a nominee or wholly-owned subsidiary corporation of such
Authorized Holder or its designee, or under a new lease subject to and
in accordance with this Article 56, such Authorized Holder or such
designee may assign this Lease or such new lease, as the case may be,
and notwithstanding anything contained in Section 24.4 hereof shall
thereupon be released from all liability for the performance or
observance of the agreements, terms, covenants and conditions in such
lease contained on Tenant's part to be performed and observed from and
after the date of such assignment, provided and on condition that (i)
such Authorized Holder or such designee shall have complied with (a) the
second sentence of Section 24.1 hereof and (b) the terms and conditions
of Section 24.2 hereof, (ii) such assignee shall have in the reasonable
judgement of Landlord, sufficient financial worth to perform the
obligations of Tenant under this Lease as evidenced by the submission to
Landlord of evidence reasonably satisfactory to Landlord of the
financial worth of any such assignee and (iii) such assignee shall at
all times retain a Qualified Manager for the Premises and shall have
notified Landlord of such Qualified Manager and delivered reasonable
documentation as to the experience and expertise of such Qualified
Manager to Landlord.
56.4 For all purposes of this Lease, an "AUTHORIZED INSTITUTION" means (a) a
bank, savings and loan institution, trust or insurance company, real
estate investment trust, a pension, welfare or retirement fund, an
eleemosynary institution, a commercial bank or trust company acting as
trustee in connection with the issuance of any bonds or any other debt
financing (securitized or otherwise), a special purpose corporation or
other entity established for the purpose of securitized financing which
is owned wholly by any other Authorized Institution(s), or any
combination of the foregoing, acting for its own account or as a
trustee, provided, that each of the above entities, or any combination
of such entities, shall qualify as an Authorized Institution for
purposes of this Lease only if (i) each such entity is not a related
entity of Tenant and (ii) each such entity, or combination of such
entities, or the parent or parents of such entity or entities, or a
guarantor reasonably satisfactory to Landlord of each such entity under
a guaranty to and for the benefit of Landlord in form and substance
reasonably satisfactory to Landlord, shall have individual or combined,
as the case may be, net worth of at least $100,000,000 (subject to CPI
Increase each Lease Year, commencing with the first Lease Year) as of
the date of the giving of a Leasehold Mortgage by Tenant to any such
aforementioned Person or (b) a governmental or quasi-governmental
instrumentality.
<PAGE> 68
57. Miscellaneous Provisions.
57.1 This Lease may be executed in several counterparts, but the counterparts
shall constitute but one and the same instrument.
<PAGE> 69
IN WITNESS WHEREOF, the parties have executed this Lease as of
the date first above written.
LANDLORD: NEW COMMONWEALTH CENTER LIMITED PARTNERSHIP
By: NEW COMMONWEALTH CENTER CORP.,
its general partner
By: /s/ Brian J. Collins
-----------------------------------------------
Name:
Title:
TENANT: WASHINGTON D.C. SPORTS CLUB, INC.
By: /s/ John M. Gibbons
-----------------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.71
Separation From Employment Agreement dated as of February 11,
2000 by and between Registrant and John M. Gibbons.
<PAGE> 2
SEPARATION FROM EMPLOYMENT AGREEMENT
THIS SEPARATION FROM EMPLOYMENT AGREEMENT is made and entered into as of
February 11, 2000 (the "AGREEMENT"), by and between The Sports Club Company,
Inc., a Delaware corporation (the "COMPANY") and John M. Gibbons (the
"EXECUTIVE").
R E C I T A L S
A. Executive serves as President and Chief Executive Officer of Company
pursuant to an Employment Contract dated October 16, 1998, as amended to date
(the "Employment Agreement").
B. Executive and Company have agreed to terminate Executive's employment
with Company on the terms and conditions set forth herein.
A G R E E M E N T
NOW, THEREFORE, based on the preceding facts and in consideration of the
agreements of the parties set forth below, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
1. TERMINATION OF EMPLOYMENT. Company and Executive hereby terminate the
Employment Agreement and the employment relationship between them as of February
11, 2000 (the "Termination Date"). Executive hereby resigns from the Board of
Directors effective as of the Termination Date.
2. CONSULTING RELATIONSHIP. Executive shall serve as a consultant to the
Company as requested by the Chief Executive Officer of Company on terms mutually
acceptable to Company and Executive. Company shall pay to Executive all
reasonable expenses incurred by Executive in rendering services requested by
Company, and Executive shall provide documentation of such expenses in
accordance with Company policies.
3. SEVERANCE PAYMENTS. Executive shall be entitled to the following
payments:
(a) Executive shall be entitled to receive (i) payments at the
rate of $250,000 per year (the "Current Rate") as set forth in Section 4(f) of
the Employment Agreement for a period of twelve months following the Termination
Date (paid in the manner the Company pays salary to its executive employees),
provided that if Executive engages in any Designated Activity (as defined
below), then the Company's obligation to make payments pursuant to this Section
3(a) (i) shall terminate; and (ii) a payout of unused vacation pay in the amount
of $22,160.91, representing 184.38 hours of unused vacation time which Executive
agrees and acknowledges constitutes payment in full for all of Executive's
unused vacation time at the Current Rate. As used herein, Executive shall be
deemed to be engaged in a Designated Activity if Executive shall knowingly,
directly or indirectly, and whether as a principal, agent, employee or
otherwise, or alone or in association with any individual or other entity, carry
on, be engaged or employed by or take part in, consult, or advise for personal
gain, or own, share in the earnings of, or finance, whether as a lender,
investor or otherwise, Brentwood Associates, Racquetball and Fitness Clubs, Inc.
or any of their affiliates (the "Spectrum Operators") in connection with (a) the
acquisition, management or operation of health and fitness clubs, or (b) the
performance of obligations under the Transition Services Agreement entered into
in connection with the sale of the Spectrum Clubs to the Spectrum Operators.
Executive agrees that the foregoing restrictions are reasonable in light of (x)
the nature and extent of the Company's proprietary information provided to the
Spectrum Operators in connection with the sale of the Spectrum Clubs, and (y)
the Company's legitimate interest in preventing the Spectrum Operators from
acquiring additional information regarding the operation of the Company.
(b) Executive shall be entitled to a bonus payment of $70,000
with respect to services rendered in 1999, payable at the same time bonuses are
paid to other executive officers of the Company with respect to 1999.
<PAGE> 3
Except as set forth above or as required by the U.S. Comprehensive Omnibus
Budget Reconciliation Act of 1985 ("COBRA") or other applicable law, Executive
shall have no right to additional compensation or benefits from the Company
following the Termination Date.
4. INDEMNIFICATION AGREEMENT; STOCK OPTIONS. The Indemnification
Agreement dated October 7, 1994, and all stock options previously granted to
Executive shall remain in effect in accordance with their terms, provided that
all such stock options shall terminate 90 days following the Termination Date.
5. REPRESENTATIONS AND WARRANTIES OF COMPANY. Company hereby makes the
following representations and warranties:
(a) Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware.
(b) All corporate and other actions required to be taken by or
on the part of Company to authorize Company to execute and deliver this
Agreement and to perform its obligations hereunder have been duly and validly
taken.
(c) The execution and the delivery by Company of this Agreement
does not and will not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under, (iii) result in a
violation of, or (iv) require any authorization, consent or approval not
heretofore obtained pursuant to, any binding written or oral agreement or
instrument, charter document, trust instrument, indenture or evidence of
indebtedness, lease, contract or other obligation or commitment (each, a
"CONTRACTUAL OBLIGATION") binding upon Company or any of its properties or
assets, or any law, rule, regulation, restriction, order, writ, judgment, award,
determination, injunction or decree of any court or government, or any decision
or ruling of any arbitrator (each, a "REQUIREMENT OF LAW") binding upon or
applicable to Company or any of its properties or assets.
(d) This Agreement constitutes the legal, valid and binding
obligation of Company and is enforceable against Company in accordance with its
terms, subject to applicable bankruptcy, insolvency or other similar laws or
proceedings limiting creditors' rights generally and to general equitable
principles.
6. REPRESENTATIONS AND WARRANTIES OF EXECUTIVE. Executive hereby makes
the following representations and warranties:
(a) The execution and the delivery by Executive of this
Agreement does not and will not (i) conflict with or result in a breach of the
terms, conditions or provisions of, (ii) constitute a default under, (iii)
result in a violation of, or (iv) require any authorization, consent or approval
not heretofore obtained pursuant to, any Contractual Obligation or Requirement
of Law to which Executive is a party or is otherwise subject.
(b) This Agreement constitutes the legal, valid and binding
obligation of Executive and is enforceable against Executive in accordance with
its terms, subject to applicable bankruptcy, insolvency or other similar laws or
proceedings affecting creditors rights generally and to general equitable
principles.
7. RELEASE OF CLAIMS.
(a) RELEASED MATTERS. Except for obligations set forth in this
Agreement (including the Company's obligations under COBRA, the Indemnification
Agreement, and the stock options referred to in sections 3 and 4), each of
Company and Executive releases and discharges the other and the other's
shareholders, agents and sureties, both in individual and corporate capacities,
from any and all claims, demands, promises, controversies, actions, differences,
disputes, causes of action, suits, debts, liabilities, obligations, rights,
allegations of misconduct and complaints of whatever character, nature or kind,
in law or equity, known or unknown, suspected or unsuspected
<PAGE> 4
(collectively, the "CLAIMS") that may exist between them, relating to or arising
out of any matter, cause or thing whatsoever, including, without limitation, any
Claims in any way relating to or arising out of Executive's employment by
Company (collectively, the "RELEASED MATTERS").
(b) UNKNOWN CLAIMS. Company and Executive recognize and
acknowledge that they may discover facts other than, different from or in
addition to the facts now known or believed by them to be true, and on the basis
of which they have executed and delivered this Agreement and given and granted
the waivers and releases provided for herein, which Company and Executive may
not have given or granted had such other, different or additional facts been
known by such party. Notwithstanding such possibility, each of Company and
Executive nevertheless intends that this Agreement, and the waivers and releases
provided for herein, shall remain effective in all respects and particulars and
for all purposes notwithstanding any such other, different or additional facts
and shall constitute an absolute bar to each and every obligation, liability,
claim, demand or cause of action with respect to which the waivers and releases
provided for herein are given. Without limiting the generality of the foregoing,
and in furtherance of the intention of the parties as set forth above, the
parties hereby irrevocably and forever relinquish all rights and benefits under
Section 1542 of the California Civil Code, which provides as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
Each party acknowledges that the foregoing waiver of the provisions of Section
1542 of the California Civil Code was separately bargained for. Each party
expressly consents that this Agreement shall be given full force and effect in
accordance with each and all of its express terms and provisions to the same
effect as those terms and provisions relating to any other claims, demands and
causes of action hereinabove specified. Each party is aware that he or its
attorney may hereafter discover facts different from or in addition to the facts
which he or its attorney now believes to be true with respect to the subject
matter of this Agreement, but that it is such party's intention hereby to settle
fully, finally, absolutely and forever any and all Claims relating to the
Released Matters which now or in the future may exist, or which heretofore have
existed.
(c) Without limiting the generality of the foregoing, the Claims
shall include any Claims arising out of or in any manner related to Executive's
hiring by, employment with, or termination from employment with Company,
including but not limited to any lawsuit, complaint, claim, petition or cause of
action of any kind whatsoever under common law or under any federal or state law
or regulation alleging breach of contract, express or implied, quasi-contract,
promissory estoppel, wrongful termination, constructive discharge, breach of
implied covenant of good faith and fair dealing, intentional or negligent
infliction of emotional distress, defamation, fraud, deceit, violation of any
statute or public policy, intentional or negligent misrepresentation, any other
intentional or negligent act or omission, or any discrimination or harassment on
the basis of race, color, religion, age, sex, pregnancy, sexual preference,
national origin or ancestry, immigration status, union status, disability,
physical handicap, medical condition, or marital status, including, but not
limited to, any alleged violation of the U.S. Fair Labor Standards Act of 1938,
as amended, 29 U.S.C. Section 201, et seq.; the U.S. Equal Pay Act, as amended,
29 U.S.C. Section 206(d); the U.S. Rehabilitation Acts, as amended, 29 U.S.C.
Section 701, et seq.; the U.S. Americans With Disabilities Act ("ADA"), as
amended, 42 U.S.C. Section 12,101; the U.S. Executive Retirement Income Security
Act of 1974 ("ERISA"), as amended, 29 U.S.C. Section 1001, et seq.; the U.S.
Comprehensive Omnibus Budget Reconciliation Act of 1985 ("COBRA"), as amended,
originally enacted as P.L. 99-272, signed into law on April 7, 1986; the U.S.
Age Discrimination in Employment Act of 1967, as amended, 29 U.S.C. Section 621,
et seq.; Title VII of the U.S. Civil Rights Act of 1964 ("TITLE VII"), as
amended, 42 U.S.C. Section 2000e, et seq.; the U.S. Reconstruction Era Civil
Rights Acts, as amended, 42 U.S.C. Sections 1981-1988, inclusive; regulations of
the U.S. Office of Federal Contract Compliance Programs, as amended, 41 C.F.R.
Section 60, et seq.; the California Workers' Compensation Act, as amended, Labor
Code Section 3600, et seq.; the California Fair Employment and Housing Act
("FEHA"), as amended, Government Code Section 12,900 et seq.; the California
Unruh Civil Rights Act, as amended, Civil Code Section 51, et seq.; the
California Labor Code, Sections 132(a), 970-973, 976-977, 1020-1054, 1101-1105,
and 1197.5-1199.5, inclusive; the wage and hour orders of the California
Industrial Welfare Commission, enforced by the Division of Labor Standards
Enforcement; the respective Constitutions of the United States of America and
the State of California; and any claim for any attorney's or attorneys' fees,
costs or expenses
<PAGE> 5
of any kind or nature whatsoever, whether now known or unknown, fixed or
contingent, of as well as any now known or unknown personal injuries or damages
of every kind and nature whatsoever resulting, or that may result, therefrom.
(d) Each of the parties represents and warrants that (i) in
executing this Agreement, such party has sought legal advice from California
legal counsel of his or its choice; (ii) such party has read the contents of
this Agreement; (iii) the terms of this Agreement and its consequences have been
completely read by, and satisfactorily explained to such party by such party's
counsel; (iv) such party fully understands the terms and consequences of this
Agreement and voluntarily accepts the terms and consequences of this Agreement;
and (v) hereafter such party shall not deny the validity of this Agreement on
the ground that he or it did not fully understand the legal consequences of this
Agreement or was not fully apprised of such legal consequences by such party's
counsel.
8. DISCLAIMER OF LIABILITY. Each of Company and Executive acknowledges
that (a) Section 7 of this Agreement reflects a release and waiver of all Claims
relating to the Released Matters; (b) neither the matters contained in this
Agreement, nor the negotiation of this Agreement, should be considered
admissions of any liability whatsoever by any party to this Agreement; and (c)
no past or present wrongdoing on the part of any party shall be implied from the
negotiation or execution of this Agreement.
9. NON-INTERFERENCE. For a period of one (1) year from the date of this
Agreement, Executive agrees that he will not directly or indirectly, as an
Executive, employer, agent, principal, proprietor, general partner, ten percent
(10%) or more stockholder or owner, consultant, director, corporate officer,
whether alone or in association with others:
(a) Induce or influence (or seek to induce or influence) any
person who is engaged (as an Executive, agent, independent contractor, or
otherwise) by Company to terminate his or her employment or engagement.
(b) Induce or influence (or seek to induce or influence) any
customer or patron of Company to terminate his or her relationship with Company;
provided that, the foregoing shall not prevent Executive from working with
competitors of Company.
(c) Induce (or attempt to induce) any of Company's suppliers,
vendors or contractors to cease doing business with Company; provided that, the
foregoing shall not prevent Executive from working with competitors of Company.
(d) Otherwise disparage the Company, its officers, directors,
shareholders or other agents.
Executive acknowledges that his breach of any of the terms of this Section 9
would cause Company irreparable harm and injury that could not be compensated
adequately by an award of monetary damages. Accordingly, if any such breach
should occur, Executive acknowledges that Company shall be entitled to equitable
relief (including temporary restraining orders, preliminary and permanent
injunction and specific performance) in addition to any other remedies available
to it at law.
10. RETURN OF CORPORATE PROPERTY. Upon the Termination Date, Executive
shall (except as otherwise required in connection with consulting services
requested by Company) turn over to Company all property, writings or documents
then in his possession or under his control, belonging to or relating to the
affairs of Company or comprising or relating to Company's proprietary
information, provided, that Executive shall be entitled to copies of his
personal correspondence.
11. COMPLETE RELEASE; INDEMNITY. Executive warrants and represents to
Company that he has not heretofore assigned, transferred, or purported to assign
or transfer, to any person or entity, any claim, or any portion thereof, or any
interest therein arising from, based upon or relating to the Released Claims, to
any other person or
<PAGE> 6
entity, and agrees to indemnify, defend and hold harmless each and all of the
Released Parties from and against any and all claims based on or arising out of
any such assignment, transfer or purported assignment or transfer of the claims
arising from, based upon or relating to the Released Claims. Executive further
agrees that this Agreement may be pleaded as a full and complete defense to, and
Executive hereby consents that it may be used as the basis for an injunction
against any action, suit or other proceeding based upon any claims, demands,
liabilities, suits, debts, liens, contracts, agreements, promises, damages,
obligations, losses, costs, expenses or actions and causes of action of every
kind, released by this Agreement.
12. MISCELLANEOUS.
(a) SEVERABILITY. If any paragraph, or part of any paragraph, of
this Agreement is rendered void, invalid or unenforceable by any court of law
for any reason, such invalidity or unenforceability shall not void or render
invalid or unenforceable any other paragraph (or part of any paragraph) of this
Agreement.
(b) WAIVER AND AMENDMENT. Any of the terms or provisions of this
Agreement may be waived at any time by the party which is entitled to the
benefit thereof, but only by a written instrument executed by such party. This
Agreement may be amended, supplemented or modified only by an agreement in
writing executed by Company and Executive.
(c) NOTICES. All notices, requests, demands, deliveries and
other communications required or permitted hereunder shall be in writing and,
except as otherwise specifically provided in this Agreement, shall be deemed to
have been duly given, upon receipt, if delivered personally or via fax, or three
(3) business days after deposit in the U.S. mail, if mailed, first class with
postage prepaid to the parties at the following addresses:
If to Company:
The Sports Club Company, Inc.
11100 Santa Monica Blvd., Suite 300
Los Angeles, California 90025
Attn: Chief Executive Officer
Fax: 310-479-8879
with a copy to:
Kinsella, Boesch, Fujikawa & Towle, LLP
1901 Avenue of the Stars, Seventh Floor
Los Angeles, California 90067-6009
Attn: Ronald K. Fujikawa, Esq.
Fax: 310-284-6018
If to Executive to:
John M. Gibbons
1455 East Mountain Drive
Montecito, CA 93108
Fax: (805) 969-1359
with a copy to:
Terry Connery
Price Postel & Parma
P.O. Box 99
Santa Barbara, CA 93102-0099
<PAGE> 7
Fax: (805) 965-3978
Any party hereto may, from time to time, change its address for receiving
notices by giving written notice thereof to the other(s) in accordance with the
terms hereof.
(d) COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto with respect to the subject matter hereof
and supersedes all prior and contemporaneous written and oral negotiations,
discussions and agreements between the parties with respect to such subject
matter.
<PAGE> 8
(f) SUCCESSORS. This Agreement shall be binding on, and shall
inure to the benefit of and be enforceable by, the parties hereto and their
respective successors and permitted assigns.
(g) HEADINGS. The section headings contained in this Agreement
are for convenience only and shall not control or affect the meaning or
construction of any of the provisions of this Agreement.
(h) GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of California
applicable to agreements to be entered into and entirely performed within such
State.
(i) DELAY, ETC. No delay or omission to exercise any right,
power or remedy accruing to any party hereto shall impair any such right, power
or remedy of such party nor be construed to be a waiver of any such right, power
or remedy nor constitute any course of dealing or performance hereunder.
(j) COSTS AND ATTORNEYS' FEES. If any action, suit, arbitration
proceeding or other proceeding is instituted arising out of this Agreement, the
prevailing party shall recover all of such party's costs, including, without
limitation, the court costs and attorneys' fees incurred therein, including any
and all appeals or petitions therefrom. As used herein, "attorneys' fees" shall
mean the full and actual costs of any legal services actually rendered in
connection with the matters involved, calculated on the basis of the usual fee
charged by the attorneys performing such services.
(k) ASSIGNMENT. Neither this Agreement nor any right pursuant
hereto or interest herein shall be assignable by either of the parties hereto
without the prior written consent of the other party hereto, except as expressly
permitted herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
THE SPORTS CLUB COMPANY, INC. EXECUTIVE
By: /s/ D. Michael Talla /s/ John M. Gibbons
-------------------------------------- ------------------------------------
Chairman of the Board of Directors and John M. Gibbons
Co-Chief Executive Officer
<PAGE> 1
EXHIBIT 10.72
Amendment to Option on Future Clubs Agreement dated as of
March 11, 1999 by and between the Registrant and
Millennium Partners, LLC
<PAGE> 2
THE SPORTS CLUB COMPANY, INC.
11100 Santa Monica Boulevard, Suite 300
Los Angeles, California 90025
March 11, 1999
Millennium Partners LLC
1995 Broadway, 3rd Floor
New York, New York 10023-5882
Re: Amendment to Option on Future Clubs Agreement
Gentlemen:
This letter agreement will amend that certain letter agreement regarding
the option on future clubs dated October 27, 1998 previously entered into by and
between you, Millennium Partners LLC ("Millennium"), and us, The Sports Club
Company, Inc. ("SCC") (the "Prior Letter Agreement") as follows:
Any capitalized term otherwise not defined in this letter agreement
shall have the meaning given such term in the Prior Letter Agreement.
Clause A of paragraph 1 of the Prior Letter Agreement shall be deemed
modified and restated in its entirety as follows:
"A. Subject to any adjustment required pursuant to clauses B, D and E
below (except with respect to items (i) and (ii) of this clause A) and
notwithstanding anything to the contrary in the health club lease for
the SF Project (the "SF Lease")), the annual rent under the lease for a
health club in (i) Washington, D.C. (the "Washington, D.C. Lease") shall
be $3 million, (ii) Boston (the "Boston Lease") shall be $2.75 million,
(iii) the third City (the "Third City Lease") with respect to which SCC
shall have exercised an option to lease subject to and in accordance
with this letter agreement shall be $2.5 million, (iv) the fourth City
(the "Fourth City Lease") with respect to which SCC shall have exercised
an option to lease subject to and in accordance with this letter
agreement shall be $2.5 million and (v) the fifth City (the "Fifth City
Lease") with respect to which SCC shall have exercised an option to
lease subject to and in accordance with this letter agreement shall be
$2.75 million."
(a) Provided that (i) neither SCC nor any affiliate of SCC then remains
in monetary default under any lease or other written agreement (including,
without limitation, that certain participation agreement between Millennium and
SCC dated as of October 27, 1998 (the "Participation Agreement")) with
Millennium or any affiliate of Millennium after the expiration of any applicable
notice, grace and/or cure periods and (ii) any such lease(s) has not been
terminated as a result of any default thereunder by SCC or any affiliate of SCC,
then, if and to the extent the aggregate amount of fixed annual rent actually
paid by SCC or any affiliates of SCC under the leases with Millennium or any
affiliates of Millennium for a Lease Year (as defined in the San Francisco
health club lease) after December 31, 2005 exceeds the Average Leased Premises
Rent (as defined in the Participation Agreement), then, in such event,
Millennium shall pay to SCC, within thirty (30) days after Millennium's receipt
of a NDC Statement (as defined in the Participation Agreement) for any such
Lease Year, the Excess Average Rent (as defined in the Participation Agreement)
which has not been
<PAGE> 3
theretofore refunded to SCC or credited against NDC Rent (as defined in the
Participation Agreement), together with interest thereon at the rate of 11% per
annum (the "Interest Rate") from the date any such outstanding Excess Average
Rent was received by Millennium to the date paid to SCC. SCC and Millennium
agree and acknowledge that notwithstanding anything to the contrary contained in
Section 3.2 of the Participation Agreement that for the purpose of determining
Excess Average Rent, the amount paid to SCC subject to and in accordance with
this paragraph 3(a) shall be deducted when so paid to SCC from the aggregate
amount of fixed annual rent under the Agreements of Lease (as defined in the
Participation Agreement).
(b) (i) Provided that (1) neither SCC nor any affiliate of SCC
then remains in monetary default under any lease or other written agreement
(including, without limitation, the Participation Agreement) with Millennium or
any affiliate of Millennium after the expiration of any applicable notice, grace
and/or cure periods, (2) any such lease(s) has not been terminated as a result
of any default thereunder by SCC or any affiliate or SCC and (3) the rent
commencement date has occurred under the Boston Lease (the "Boston Lease
Commencement Date"), then, until the aggregate amount of fixed annual rent
actually paid by SCC or any affiliate of SCC under the leases with Millennium or
any affiliates of Millennium for a Lease Year is less than or equal to the
Average Leased Premises Rent (without regard to the Refund Rent (as hereinafter
defined) or any rent abatement under any lease with Millennium or any affiliate
of Millennium), Millennium shall refund $250,000 to SCC (the "Refund Rent") each
Lease Year in twelve (12) equal monthly installments on the tenth (10th) day of
each calendar month commencing on the tenth (10th) day of the calendar month
immediately following the calendar month in which the Boston Lease Commencement
Date occurs and ending on the date on which the entire Refund Rent for any such
Lease Year is refunded to SCC.
(ii) SCC and Millennium agree and acknowledge that in
the event Millennium shall fail to pay SCC Refund Rent subject to and in
accordance with paragraph 3(b)(i) hereof, then, in such event, any such amount
of unpaid Refund Rent, together with interest thereon at the Interest Rate from
the date such amount was due to the date such amount is refunded to SCC or
credited against NDC Rent, shall be credited against the next installment of NDC
Rent payable under the Participation Agreement.
(iii) SCC and Millennium agree and acknowledge that
notwithstanding anything to the contrary contained in Section 3.2 of the
Participation Agreement, that for the purpose of determining the Excess Average
Rent and/or the Average Leased Premises Rent for a particular Lease Year the
amount of fixed annual rent under the Boston Lease shall be deemed to be $2.5
million, rather than $2.75 million.
(a) (i) Provided that neither SCC nor any affiliate of SCC then remains
in monetary default under any lease or other written agreement (including,
without limitation, the Participation Agreement) with Millennium or any
affiliate of Millennium after the expiration of any applicable notice, grace
and/or cure periods, then, in the event (1) of the transfer by Millennium or any
affiliate of Millennium of the entire fee title to the SF Project to a third
party (other than to an Affiliate (as hereinafter defined) of Millennium
(provided that the
<PAGE> 4
principal purpose of any such transfer is not the circumventing of the
obligation of Millennium contained in this paragraph 4(a)(i)) or any transferee
who acquires any such fee title under any mortgage or building loan agreement,
whether now or hereafter in effect, or any renewal, addition, modification,
consolidation, replacement or extension of any such mortgage or loan agreement
through foreclosure proceeding or an assignment or deed in lieu of foreclosure)
and (2) as of the date of such transfer the unexpired portion of the term of the
SF Lease is at least five (5) years or the tenant thereunder exercises an
extension option under the SF Lease, regardless of whether the tenant thereunder
then would otherwise have the right to exercise same, by delivering to
Millennium notice thereof within ten (10) days following written notice from
Millennium of any such anticipated transfer (which exercise notice from the
tenant thereunder may be conditioned upon the actual consummation of such
transfer) , then, in such event, Millennium shall pay to SCC simultaneously with
any such transfer of fee title to the SF Project the sum of (aa) $2.5 million
plus (bb) any Excess Average Rent which has not been theretofore refunded to SCC
or credited against NDC Rent, together with interest thereon at the Interest
Rate from the date any such outstanding Excess Average Rent was received by
Millennium to the date paid to SCC. SCC and Millennium agree and acknowledge
that notwithstanding anything to the contrary contained in Section 3.2 of the
Participation Agreement that for the purpose of determining Excess Average Rent,
the amount described in clause (bb) of this paragraph 4(a)(i) paid to SCC
subject to and in accordance with this paragraph 4(a)(i) shall be deducted from
the aggregate amount of fixed annual rent under the Agreements of Lease. For
purposes of this letter agreement, (x) "Affiliate" shall mean any natural person
or persons, a partnership, a corporation or any other form of business or legal
association or entity (generically and collectively, "Person") which shall (xx)
Control (as hereinafter defined), (yy) be under the Control of, or (zz) be under
common Control with the Person in question and (y) "Control" or "control" shall
mean ownership of fifty percent (50%) or more of the outstanding voting stock of
a corporation or other majority equity and control interest if not a corporation
and the possession of power to direct or cause the direction of the management
and policy of such corporation or other entity, whether through the ownership of
voting securities, by statute or according to the provisions of a contract.
(ii) Provided that neither SCC nor any affiliate of SCC
then remains in monetary default under any lease or other written agreement
(including, without limitation, the Participation Agreement) with Millennium or
any affiliate of Millennium after the expiration of any applicable notice, grace
and/or cure periods, then, in the event (1) of the transfer by Millennium or any
affiliate of Millennium of the entire fee title to the project in which the
leased premises under the Washington, D.C. Lease is situated (the "Washington,
D.C. Project") to a third party (other than to an Affiliate of Millennium
(provided that the principal purpose of any such transfer is not the
circumventing of the obligation of Millennium contained in this paragraph
4(a)(ii)) or any transferee who acquires any such fee title under any mortgage
or building loan agreement, whether now or hereafter in effect, or any renewal,
addition, modification, consolidation, replacement or extension of any such
mortgage or loan agreement through foreclosure proceeding or an assignment or
deed in lieu of foreclosure) and (2) as of the date of such transfer the
unexpired portion of the term of the Washington, D.C. Lease is at least
<PAGE> 5
five (5) years or the tenant thereunder exercises an extension option under the
Washington, D.C. Lease, regardless of whether the tenant thereunder then would
otherwise have the right to exercise same, by delivering to Millennium notice
thereof within ten (10) days following written notice from Millennium of any
such anticipated transfer (which exercise notice from the tenant thereunder may
be conditioned upon the actual consummation of such transfer), then, in such
event, Millennium shall pay to SCC simultaneously with any such transfer of fee
title to the Washington, D.C. Project the sum of (aa) $2.5 million plus (bb) any
Excess Average Rent which has not been theretofore refunded to SCC or credited
against NDC Rent, together with interest thereon at the Interest Rate from the
date any such outstanding Excess Average Rent was received by Millennium to the
date paid to SCC. SCC and Millennium agree and acknowledge that notwithstanding
anything to the contrary in Section 3.2 of the Participation Agreement that for
the purpose of determining Excess Average Rent, the amount described in clause
(bb) of this paragraph 4(a)(ii) paid to SCC subject to and in accordance with
this paragraph 4(a)(ii) shall be deducted from the aggregate amount of fixed
annual rent under the Agreements of Lease.
SCC and Millennium agree and acknowledge that notwithstanding
anything to the contrary contained in clause A of paragraph 1 of the Prior
Letter Agreement, as modified and restated by this letter agreement, in the
event SCC shall continue to have an option under the Prior Letter Agreement to
enter into a lease for a health club with Millennium or an affiliate of
Millennium and the SF Project and/or the Washington, D.C. Project is transferred
as described in paragraph 4(a) hereof, then, the annual rent under the
immediately following health club lease which SCC elects to enter into under the
Prior Letter Agreement (exclusive of the Boston Lease) shall be adjusted so that
the average fixed annual rent under (i) such lease, (ii) the leases already
entered into under the Prior Letter Agreement (exclusive of the Washington, D.C.
Lease if the Washington, D.C. Project is transferred as described in paragraph
4(a) hereof), (iii) the SF Lease (unless the SF Project is transferred as
described in paragraph 4(a) hereof) and (iv) the remaining leases with respect
to which SCC has a continued option to lease under the Prior Letter Agreement as
described in clause A of paragraph 1 thereof, shall be $2.75 million (subject to
any adjustment required pursuant to clauses B, D and E of clause A of paragraph
1 of the Prior Letter Agreement).
(b) SCC and Millennium agree and acknowledge that
notwithstanding anything to the contrary contained in Section 3.2 of the
Participation Agreement, in the event of any transfer of the SF Project and/or
the Washington, D.C. Project as described in paragraph 4(a) hereof, then, in
each such event, the aggregate amount of fixed annual rent under the Agreement
of Lease (as defined in the Participation Agreement) at the SF Project and/or
the Washington, D.C. Project, as applicable, and the total number of rentable
square feet of the leased premises under the Agreement of Lease at the SF
Project and/or the Washington, D.C. Project, as applicable, shall not be taken
into account in connection with the determination of the Excess Average Rent and
Average Leased Premises Rent.
5. Anything herein to the contrary notwithstanding, this letter
agreement and all of the terms and provisions hereof shall be deemed effective
as of the date hereof.
<PAGE> 6
6. Except as otherwise expressly stated in this letter agreement, the
terms and conditions of the Prior Letter Agreement and the Participation
Agreement have not been modified or amended in any respect, and the Prior Letter
Agreement and the Participation Agreement remain in full force and effect.
Sincerely,
THE SPORTS CLUB COMPANY, INC.
a Delaware corporation
By: /s/ David M. Talla
---------------------------------
Its: CEO
--------------------------------
Acknowledged and agreed to as of the date first set forth above:
MILLENNIUM PARTNERS LLC,
a New York limited liability company
By: Millennium Partners Management LLC,
a New York limited liability company,
Its managing member
By: Millennium Manager I, Inc.
a New York corporation,
Its manager
By: /s/ Brian J. Collins
----------------------------------
Its:
-----------------------------------
<PAGE> 1
EXHIBIT 10.73
Settlement Agreement and Mutual Release dated as of November 16, 1999 by and
between OTR, an Ohio general partnership on the one hand and Registrant and
Spectrum Liquidating Corp on the other.
<PAGE> 2
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE ("Agreement") is entered
into effective November 16, 1999 by and between OTR, an Ohio general partnership
("OTR"), on the one hand, and THE SPORTS CLUB COMPANY, a Delaware corporation
("The Sports Club") and SPECTRUM LIQUIDATING CORP., a California corporation
formerly known as SPECTRUM CLUB/ANAHEIM HILLS ("Spectrum") (sometimes
collectively referred to herein as "Defendants"), on the other hand, in relation
to Orange County Superior Court Case No. 794610 entitled OTR v. Spectrum
Club/Anaheim Hills and The Sports Club Company, and the cross-complaint on file
therein entitled Spectrum Liquidating Corporation, a California Corporation
Formerly Known as Spectrum Club/Anaheim Hills, and The Sports Club Company v.
OTR, Donahue Schrieber, and Michele Holling (the complaint and cross-complaint
will hereinafter collectively be referred to as the "Action" unless specified
otherwise), and the other facts set forth herein.
RECITALS
A. OTR, as landlord, and Spectrum, as tenant, entered into a written
lease dated October 14, 1997 for certain premises to be constructed at 8060
Santa Ana Canyon Road, Anaheim, County of Orange, California (the "Premises"),
from which Premises Spectrum was to operate a health club. OTR and Spectrum also
executed a First Amendment to Lease Agreement dated October 15, 1997. The lease
and first amendment thereto will be referred to hereinafter collectively as the
"Lease."
B. The Sports Club duly executed and delivered to OTR a written lease
guaranty dated October 14, 1997 whereby, for good and valuable consideration,
The Sports Club unconditionally guaranteed to OTR the full and faithful
performance of all of the terms, covenants and conditions of the Lease to be
kept and performed by Spectrum, including payment of all rentals and other
charges due thereunder (the "Guaranty").
C. On or about April 13, 1998 Defendants gave written notice to OTR
purporting to rescind the Lease and the Guaranty on several grounds. Spectrum
thereafter refused to construct its athletic facility at the Premises and
refused to go forward with the Lease. The Sports Club thereafter refused to
acknowledge or perform its obligations under the Guaranty.
D. OTR disputed the purported rescission by Spectrum and The Sports Club
and maintained that they were each bound to perform their obligations under the
Lease and the Guaranty, respectively. On May 21, 1998 OTR commenced the Action
by filing its complaint for breach of lease and breach of written guaranty
against Defendants (the "Complaint"). On or about July 6, 1998 Spectrum and The
Sports Club filed an answer to the complaint and a cross-complaint for
restitution, fraud, negligent misrepresentation and declaratory relief against
OTR,
<PAGE> 3
Donahue Schrieber, a California corporation ("Donahue Schrieber"), and Michele
Holling Babcock ("Holling"), an individual ( the "Cross-Complaint").
E. The parties hereto wish to resolve the claims raised in the Action
and all other disputes between them on the terms set forth below, effective
November 2, 1999.
NOW, THEREFORE, in consideration of the mutual promises, terms,
conditions, provisions and covenants described below, which consideration is
hereby acknowledged by all parties, the parties hereby agree to settle their
claims as follows:
1. Payment. Defendants will pay OTR the principal sum of Two Million
Nine Hundred Fifty Thousand Dollars ($2,950,000.00), as follows:
a. Two Million Dollars ($2,000,000.00) on or before November
16, 1999; and
b. Nine Hundred Fifty Thousand Dollars ($950,000.00), plus
interest thereon at the rate of thirteen percent (13%) per annum from November
2, 1999 until payment in full, which payment of all principal and accrued
interest shall be made on or before June 1, 2000.
2. Stipulated Judgment. Timely payment of the amounts set forth in
Paragraph 1, above, shall be secured by the Stipulation for Entry of Judgment
executed by OTR and Defendants concurrent with this Agreement and attached
hereto as Exhibit 1 (the "Stipulation"). The Stipulation is hereby incorporated
herein, made a part of this Agreement, and approved as to form by counsel for
the parties.
3. Default, Notice to Cure, and Entry of Judgment. Should Defendants
default in their payment obligation under this Agreement, OTR may seek entry of
judgment against Defendants, by ex parte application, pursuant to the terms and
conditions of the Stipulation. Defendants shall be considered in default if any
payment required to be made under Paragraph 1, above, is not received by OTR by
the date set forth for such payment in Paragraph 1, and Defendants do not timely
cure their failure to make such payment after service of notice to cure pursuant
to the terms and conditions of the Stipulation. OTR shall then give Defendants
twenty-four (24) hours' notice of OTR's ex parte application for entry of
judgment pursuant to the Stipulation.
4. Execution on Judgment. OTR will not file the Stipulation, nor seek to
have judgment entered pursuant thereto, unless and until Defendants have failed
to make timely payment as required by Paragraph 1, above, and have failed to
timely cure the failure to make payment after service of notice to cure pursuant
to the terms and conditions of the Stipulation. Should judgment be entered
pursuant to the Stipulation, OTR may immediately execute on such judgment.
<PAGE> 4
5. Return of Stipulation. Upon full and timely payment by Defendants of
all amounts called for under this Agreement, OTR will, upon demand, return the
original Stipulation to Defendants.
6. Stipulated Dismissal. Upon execution of this Agreement, Defendants
shall dismiss the Cross-Complaint as against OTR with prejudice. Said dismissal
shall not constitute a retraxit of any claims against Holling, Donahue Schrieber
or any of their respective shareholders, officers, directors, employees, agents,
representatives predecessors, successors, heirs or assigns (hereinafter
collectively the "Donahue Schrieber Group.") Upon full and timely payment of the
amounts set forth in Paragraph 1, above, OTR shall file a dismissal of its
Complaint against Defendants with prejudice. The Court shall retain jurisdiction
over the parties to enforce this Agreement pursuant to Code of Civil Procedure
section 664.6.
7. Confidentiality.
a. The parties stipulate, agree and promise that the terms and
conditions of this Agreement (the "Confidential Matters"), shall not be
described or discussed, or caused to be described or discussed in any manner,
either written or oral, directly or indirectly, with any third person, or any
unrelated organization, company or entity without the prior written consent of
the other parties hereto.
b. The parties stipulate, agree and promise to avoid any and all
publicity with respect to this Agreement and/or any of its terms or conditions,
and specifically stipulate, agree and promise not to describe or discuss the
Confidential Matters with any member of the news media, or any other person or
entity. It shall not be a violation of this confidentiality provision for any
party to disclose the Confidential Matters to its legal, financial or tax
advisors, so long as the advisors agree to maintain the confidentiality of the
Confidential Matters.
c. In the event that any party is contacted by any member of any
media, or any other person or entity asking to comment on this Agreement, or any
other Confidential Matters, the parties stipulate, agree and promise that they
shall say nothing more than that the claims have been settled by mutual
agreement without admission of fault by any party, and specifically shall not
refer in any other manner to the terms, conditions, or amounts paid or to be
paid pursuant to the Agreement, whether in specific or general terms.
d. Nothing in this confidentiality provision shall be construed
as prohibiting any disclosure of information required by law.
8. Further Assurance. All parties hereto agree that, for their
respective selves, successors, trustees and assigns, they will abide by this
Agreement, which terms are meant to be contractual, and further agree that they
will do such acts and prepare, execute and deliver such
<PAGE> 5
documents as may reasonably be required in order to carry out the purposes and
intents of this Agreement.
9. Discharge. Except for the obligations of each party under this
Agreement, the parties hereto, for themselves and their successors, trustees,
representatives, insurers, agents and assigns hereby release and forever
discharge one another, their predecessors, successors, subsidiaries, and
affiliates and all present and former officers, directors, partners, principals,
employees, attorneys, insurers, agents and their respective administrators,
representatives, spouses, heirs, agents and assigns from any and all claims,
causes of action, suits, proceedings, debts, contracts, controversies, claims
and demands whatsoever, whether past, present or future, known or unknown, of
any kind, nature or description, now existing or which may hereafter arise from
any of the facts, acts, omissions, occurrences, events or circumstances now
existing or to arise in the future based upon the matters set forth in the
Recitals section above, or the Action herein described, whether based upon a
tort, contract or other theory of recovery and whether for compensatory,
punitive damages or otherwise.
10. General Release. Except for the obligations of each party under this
Agreement, it is understood and agreed that this Settlement Agreement and Mutual
Release shall constitute a general release between and among the parties hereto
and shall be effective as a full and final accord and satisfaction, and as a bar
to all actions, causes of action, costs, expenses, attorneys' fees, damages,
claims and liabilities whatsoever, whether or not now known, suspected, claimed
or concealed. The parties hereto acknowledge that they are familiar with Section
1542 of the California Civil Code which provides as follows:
A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
11. Civil Code Section 1542 Waiver. The parties hereto expressly waive
and relinquish any and all rights and benefits which they may have under, or
which may be conferred upon them by the provisions of Section 1542 of the
California Civil Code, as well as under any other similar state or federal
statute or common law principle, to the fullest extent that they may lawfully
waive such rights or benefits pertaining to the released claims.
12. Waiver of Unknown Claims. In connection with their waiver and
relinquishment set forth in the previous paragraph, the parties hereto
acknowledge that they are aware that they may hereafter discover claims or facts
in addition to or different from those which they now know or believe to exist
with respect to the subject matter of this Agreement, but it is their intention
to fully, finally and forever settle and release all of the disputes and
differences known or unknown, suspected or unsuspected which do now exist, may
exist in the future or have ever existed with one another, arising out of or in
connection with the subject matter of
<PAGE> 6
this Agreement or the Action. In furtherance of such intention, the parties
hereto agree that this Agreement shall remain in effect as a full and complete
Settlement Agreement and Mutual Release of the claims included in this Agreement
notwithstanding the discovery or existence of any said additional or different
claims or facts arising out of or relating to the subject matter of this
Agreement or the Action.
13. Waiver Bargained For. The parties hereto acknowledge that the
foregoing waiver was separately bargained for and is a key element of this
Agreement of which their mutual releases is a part.
14. Carve-Out From Discharge and General Release . Notwithstanding any
language contained in paragraphs 9,10,11,12, or 13 to the contrary, the
discharge and general release set forth in this Agreement is not intended to,
and shall not constitute, a discharge or release of any claims any party hereto
may have against The Donahue Schrieber Group.
15. Ownership. The parties mutually represent and warrant to each other
that no party has encumbered, assigned or transferred or purported to encumber,
assign or transfer, in whole or in part, to any person, firm, entity or
corporation whatsoever, any claim, debt, liability, demand, obligation, cost,
expense, damage, action or cause of action herein released or assigned; and the
parties mutually agree to hold harmless each other against any claims, debts,
liabilities, demands, obligations, costs, expenses, damages, actions, or causes
of action based on, arising out of, or in connection with any such transfer or
assignment or purported transfer or assignment.
16. No Admission. The purpose of this Agreement is to accomplish the
compromise and settlement of disputed and contested claims, and nothing in this
Agreement shall be construed as an admission by any party to this Agreement of
any liability of any kind to any other party to this Agreement. Each party to
this Agreement denies the allegations of each other party set forth in the
Action and further denies that such party is liable to the remaining parties in
any respect whatsoever for any injuries or damages that may have been sustained
by any other party pertaining to the Action or the circumstances set forth in
the Recitals section, above.
17. Covenant Not To Sue. Except for the obligations of the parties under
this Agreement, the parties hereto for themselves and their successors,
trustees, related entities, representatives, insurers, agents and assigns,
covenant and agree that they will forever refrain and forebear from commencing,
instituting, or prosecuting any lawsuit, proceeding or action, or in any manner
voluntarily aid the commencement, institution or prosecution of any claim,
demand, suit, proceeding or action or cause of action, state or federal, against
the other parties to this Agreement, their predecessors, successors,
subsidiaries and/or affiliates, any of their present and former officers,
directors, partners, principals, employees, attorneys, insurers or agents,
(except The Donahue Schrieber Group), and their respective administrators,
<PAGE> 7
representatives, spouses, heirs, executors, agents (except The Donahue Schrieber
Group) and assigns with respect to any matter, cause or thing whatsoever arising
out of, based in whole or in part upon, relating to, or existing, by reason of
the transaction, events, occurrences, acts, omissions, or failure to act, of
whatever kind or character whatsoever alleged or which could have been alleged
in the Action or set forth in the Recitals section, above.
18. Entire Agreement. This Agreement constitutes the complete and entire
written Agreement of compromise, settlement and release by and among the parties
hereto and constitutes the complete expression of the terms of the settlement.
All prior and contemporaneous agreements, representations, and negotiations
regarding the matters resolved herein are superseded.
19. No Modification. The terms of this Agreement can only be amended or
modified by a writing, signed by duly authorized representatives of all parties
hereto, expressly stating that such modification or amendment is intended.
20. Indemnification. Each party agrees to indemnify the other against
all losses, costs and expenses, including reasonable attorneys' fees which the
other may incur as the result of a breach of this Agreement. If there is any
dispute regarding this Agreement, the prevailing party in such dispute shall be
entitled to recover costs and reasonable attorneys' fees.
22. Jurisdiction. The parties consent to the jurisdiction of the courts
of the State of California to resolve any dispute regarding this Agreement. In
mutual recognition of the fact that this Agreement is to be performed in Orange
County, California, the parties agree that in the event any civil action is
commenced regarding this Agreement, Orange County, California, is the proper
county for the commencement and trial of such action.
23. No Waiver. Waiver of any one breach of the provisions of this
Agreement shall not be deemed a waiver of any other breach of any provision of
this Agreement.
24. Interpretation. All parties to this Agreement and their counsel have
reviewed this Agreement, and the normal rule of construction to the effect that
any ambiguities in an agreement are to be resolved against the drafting parties
shall not be employed in the interpretation of this Agreement.
25. Attorneys. The parties hereto represent and warrant that the
attorneys approving this Agreement as to form on their behalf are the attorneys
employed by such party to represent such party with respect to this Agreement
and all matters covered by and related to it and that the parties hereto have
been fully advised by said attorneys with respect to their rights and
obligations as to the execution of this Agreement. The parties hereto declare
that they know and understand the contents of this Agreement and that they have
executed the same voluntarily.
<PAGE> 8
26. No Representation. Each of the parties hereto acknowledges that no
other party, nor any agent nor any attorney of any other party has made any
promise, representation or warranty whatsoever, express or implied, not
contained herein concerning the subject matter hereof to induce said party to
execute or authorize the execution of this Agreement and acknowledges that said
party has not executed or authorized the execution of this Agreement in reliance
upon any such promise, representation or warranty not contained herein.
27. Authority. Each individual signing this Agreement directly and
expressly warrants that he or she has been given and has received and accepted
authority to so sign and execute the documents on behalf of the party for whom
it is indicated they have signed, and further has been expressly given and
received and accepted authority to enter into a binding agreement on behalf of
such party with respect to the matters contained herein and as stated herein.
28. Attorneys' Fees And Costs. Each party hereto shall be responsible
for payment of his, her or its own attorneys' fees, costs and other legal
expenses incurred in connection with the Action and all matters related thereto.
29. Counterparts. It is understood and agreed by and between the parties
hereto that this Agreement may be executed in counterpart, and a signed copy
shall have the full force and effect of a signature on any original and shall be
considered an original as to the party signing any such copy.
30. Survival. All representations and warranties in this Agreement shall
survive the execution of this Agreement and the transactions contemplated
hereunder, and are material and have been or will be relied upon by the parties
hereto notwithstanding any investigation made by or on behalf of any party.
31. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of all parties hereto and their respective heirs, representatives,
successors and assigns.
32. California Law. This Agreement shall be governed by and construed
under and in accordance with the laws of the State of California.
33. Time of Essence. Time is of the essence as to this Agreement and
every provision hereof.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
made and effective as of the date first herein above written.
OTR, an Ohio general partnership
DATED: November 16, 1999 By: /s/ Stephen A. Mitchell
----------------- --------------------------------
Stephen A. Mitchell, its General
Partner
THE SPORTS CLUB COMPANY,
A Delaware corporation
DATED: November 16, 1999 By: /s/ D. Michael Talla
----------------- --------------------------------
David Michael Talla, Chairman of
its Board of Directors
SPECTRUM LIQUIDATING CORP., a
California Corporation formerly
known as "SPECTRUM CLUB/ANAHEIM
HILLS"
DATED: November 16, 1999 By: /s/ D. Michael Talla
----------------- --------------------------------
David Michael Talla, chairman of
its Board of Directors
APPROVED AS TO FORM:
LUCE, FORWARD, HAMILTON & SCRIPPS LLP
By: /s/ Mark Hagarty
---------------------------------
Mark Hagarty
Attorneys for Plaintiff and Cross-Defendant OTR
<PAGE> 10
RAISKIN & REVITZ
By: /s/ Steven J. Revitz
---------------------------------
Steven J. Revitz
Attorneys for Defendants and Cross-Complaints
The Sports Club Company and Spectrum Liquidating
Corp., a California corporation formerly known as
Spectrum Club/Anaheim Hills
<PAGE> 1
EXHIBIT 10.74
Amendment to Registrant's 1994 Stock Incentive Plan
(As amended and Restated June 3, 1998)
<PAGE> 2
AMENDMENT TO
THE SPORTS CLUB COMPANY, INC.
1994 STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED JUNE 3, 1998)
By action taken on November 4, 1999, the Board of Directors of The
Sports Club Company, Inc. approved the following amendment to The Sports Club
Company, Inc. 1994 Stock Incentive Plan (as Amended and Restated June 3, 1998):
1. Section 6.2(e) of the Plan is amended to read in full as follows:
Medium and Time of Payment. The Exercise Price shall be paid in full, at
the time of exercise, in cash or cash equivalents, or with the approval of the
Administrator, in shares of Stock which have been held by the Optionee for a
period of at least six calendar months preceding the date of surrender and which
have a Fair Market Value equal to the Exercise Price, or in a combination of
cash and such shares, and may be effected in whole or in part (i) with monies
received from the Company at the time of exercise as a compensatory cash
payment; or (ii) to the extent that the Exercise Price exceeds the par value of
the shares so purchased, with monies borrowed from the Company in accordance
with Section 12.5. In addition, with the approval of the Administrator, an
Optionee may pay the Exercise Price for any Stock Option by authorizing the
Company to withhold from shares of Common Stock issued upon exercise of the
Stock Option that number of full shares of Common Stock having a Fair Market
Value on the Exercise Date equal to the Exercise Price.
2. Section 12.6 of the Plan is amended to read in full as follows:
Termination of Employment.
Except as provided in this Section 12.6, no Right may be exercised
unless the Rights Holder is then a Director of the Company, or in the employ of
the Company or any Parent or Subsidiary, or rendering services as a consultant
to the Company or any Parent or Subsidiary, and unless he or she has remained
continuously so employed since the Date of Grant. If the employment or services
of a Rights Holder shall terminate (other than by reason of a Special
Terminating Event), all Rights previously granted to the Rights Holder which are
exercisable at the time of such termination may be exercised for the period
ending ninety days after such termination, unless otherwise provided in the
Rights Agreement; provided, however, that no Right may be exercised following
the date of its expiration. Nothing in the Plan or in any Right granted pursuant
to the Plan shall confer upon an employee any right to continue in the employ of
the Company or any parent or Subsidiary or interfere in any way with the right
of the Company or any Parent or Subsidiary to terminate such employment at any
time.
Notwithstanding the foregoing, by agreement between an Option Holder who
is not subject to Section 16(b) of the Securities Exchange Act of 1934 and the
Administrator, termination of employment shall not affect the term of a Stock
Option, SAR or other Right, and such Right may be exercised in accordance with
its terms without regard to the foregoing paragraph.
<PAGE> 1
AMENDMENT TO
THE SPORTS CLUB COMPANY, INC.
401(k) PROFIT SHARING PLAN
ADOPTED FEBRUARY 29, 1996
By action taken February 9, 2000, the Board of Directors of The Sports
Club Company, Inc. approved the following amendment to The Sports Club Company,
Inc. 401(k) Profit Sharing Plan:
Exhibit 2, Sections 2(a)(1) and 2(a)(2) of the Adoption
Agreement are hereby amended by deleting "1 Year of Eligibility Service"
and substituting "6 Months from Employment Date", in lieu thereof; and
<PAGE> 1
EXHIBIT 10.76
Exchange Certificate
<PAGE> 2
(Face of Security)
Unless and until it is exchanged in whole or in part for Notes in definitive
form, this Note may not be transferred except as a whole by the Depository Trust
Company (the "Depository") to a nominee of the Depository or by a nominee of the
Depository to the Depository or another nominee of the Depository or by the
Depository or any such nominee to a successor Depository or a nominee of such
successor Depository. Unless this certificate is presented by an authorized
representative of the Depository to the Company or its agent for registration of
transfer, exchange or payment, and any certificate issued is registered in the
name of Cede & Co. or such other name as may be requested by an authorized
representative of Depository (and any payment hereon is made to Cede & Co. or
such other entity as may be requested by an authorized representative of
Depository), any transfer, pledge or other use hereof for value or otherwise by
or to any person is wrongful inasmuch as the registered owner hereof, Cede &
Co., has an interest herein.
The holder of this Security by its acceptance hereof agrees to offer, sell or
otherwise transfer such Security, prior to the date which is two years (or such
other period that may hereafter be provided under Rule 144(k) as permitting
resales of restricted Securities by non-affiliates without restriction) after
the later of the original issue date hereof and the last date on which the
Company or any affiliate of the Company was the owner of this Security (or any
predecessor of such Security) only (A) to the Company, (B) pursuant to a
Registration Statement which has been declared effective under the Securities
Act, (C) for so long as the Notes are eligible for resale pursuant to Rule 144A
under the Securities Act, to a person it reasonably believes is a "qualified
institutional buyer" as defined in Rule 144A under the Securities Act that
purchases for its own account or for the account of a qualified institutional
buyer to whom notice is given that the transfer is being made in reliance on
Rule 144A, (D) to an institutional "accredited investor" within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities Act that
is acquiring the Security for its own account, or for the account of such an
institutional "accredited investor," for investment purposes and not with a view
to, or for offer or sale in connection with, any distribution in violation of
the Securities Act or (E) pursuant to another available exemption from the
registration requirements of the Securities Act, subject to the Company's and
the Trustee's right prior to any such offer, sale or transfer pursuant to
clauses (D) or (E) to require the delivery of an opinion of counsel,
certification and/or other information satisfactory to each of them, and in each
of the foregoing cases, a certificate of transfer in the form appearing on this
Note is completed and delivered by the transferor to the Trustee.
<PAGE> 3
THE SPORTS CLUB COMPANY INC.
11 3/8% SERIES B SENIOR SECURED NOTE DUE 2006
No. G-1 $100,000,000
CUSIP NO. 84917P-AC-4
The Sports Club Company, Inc., a Delaware corporation (the "Company"),
as obligor, for value received promises to pay to Cede & Co. or registered
assigns, the principal sum of One Hundred Million Dollars on March 15, 2006.
Interest Payment Dates: March 15 and September 15 of each year,
commencing on September 15, 1999 and on the maturity date.
Record Dates: March 1 and September 1 (regardless of whether a Business
Day) of each year, commencing on September 1, 1999.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officers.
Dated: June __, 1999 THE SPORTS CLUB COMPANY, INC.
Attest: /s/ Lois Barberio By: /s/ John M. Gibbons
-------------------------- --------------------------------
Lois Barberio John M. Gibbons
Secretary President
This is one of the 11 3/8% Series B Senior Secured Notes due 2006 referred to in
the within-mentioned Indenture:
Authenticated:
U.S. BANK TRUST NATIONAL ASSOCIATION,
as Trustee
By: /s/ Richard Prokosch
---------------------------
Authorized Signatory
<PAGE> 1
EXHIBIT 10.77
First Amendment, dated December 3, 1999 to the
Fourth Amended and Restated Loan Agreement
by and among the Registrant, certain of its subsidiaries
and Comerica Bank - California
<PAGE> 2
FIRST AMENDMENT TO FOURTH AMENDED
AND RESTATED LOAN AGREEMENT
THIS FIRST AMENDMENT TO FOURTH AMENDED AND RESTATED LOAN AGREEMENT
("Amendment") is made and entered into as of November __, 1999 by and among: (a)
The Sports Club Company, Inc., a Delaware corporation; The Spectrum Club
Company, Inc., a California corporation; Pontius Realty, Inc., a California
corporation; The SportsMed Company, Inc., a California corporation; LA/Irvine
Sports Clubs, Ltd., a California limited partnership; Talla New York, Inc., a
New York corporation; SCC Sports Club, Inc., a Texas corporation; Canoga Agoura
Spectrum Club, Inc., a California corporation; Irvine Sports Club, Inc., a
California corporation; Green Valley Spectrum Club, Inc., a Nevada corporation;
Sports Club, Inc. of California, a California corporation; Spectrum Liquidating
Corp., a California corporation f/k/a Spectrum Club/Anaheim Hills, Inc.; TVE,
Inc., a California corporation; Spectrum Club Anaheim, a California Corporation;
SF Sports Club, Inc., a Delaware corporation; Washington D.C. Sports Club, Inc.,
a Delaware corporation; HFA Services, Inc., a California corporation; and NY
Sports Club, Inc., a Delaware corporation (collectively, the "Borrowers"); (b)
Comerica Bank-California ("Comerica"), as the Bank; and (c) Comerica
Bank-California, as agent (in such capacity, the "Agent") for the banks (the
"Banks") that are parties to the Loan Agreement (as defined below), and is made
with reference to the following:
A. Comerica, the Agent and the Borrowers have entered into that certain
Fourth Amended and Restated Loan Agreement, dated as of April 1, 1999. (Such
Loan Agreement, as so amended and as the same may hereafter be amended,
modified, extended and/or restated, is hereinafter referred to as the "Loan
Agreement".) Pursuant to the Loan Agreement, the Bank has made certain Loans to
the Borrowers and has committed to make additional Loans in the future upon the
satisfaction of certain conditions.
B. The Borrowers, the Agent and the Bank wish to amend the Loan
Agreement as more particularly set forth below.
C. The Borrowers have also requested the consent of the Agent and the
Bank set forth in Section 2 of this Amendment and the waiver set forth in
Section 7 of this Amendment.
NOW, THEREFORE, in consideration of the premises and the agreements,
conditions and covenants contained herein, the parties hereby agree as follows:
Defined Terms.
"Effective Date" shall mean the date on which each of the
conditions precedent set forth in Section 6 of this Amendment is satisfied.
All capitalized terms used in this Amendment and not otherwise
defined herein shall have the meanings assigned to them in the Loan Agreement.
Consent of the Agent and the Bank to the Sale of Certain Assets. Effective as of
the Effective Date, the Agent and the Bank hereby consent to the sale by the
Borrowers party thereto, pursuant to the Stock Purchase Agreement, dated as of
September 16, 1999, by and among Racquetball and Fitness Clubs, Inc., a Texas
corporation, The Spectrum Club Company, Inc., a California
<PAGE> 3
corporation, Canoga/Agoura Spectrum Club, Inc., a California corporation,
Spectrum Club Anaheim, a California corporation, El Segundo-TDC, Ltd., a
California limited partnership, TVE, Inc., a California corporation, and The
Sports Club Company, Inc., a Delaware corporation (the "Stock Purchase
Agreement"), of the Assets (but not of the Excluded Assets), in each case as
defined in the Asset Purchase Agreement. Notwithstanding the generality of the
foregoing sentence, the consent of the Agent and the Bank set forth therein do
not extend to any asset that is located at The Sports Club/Irvine or The Sports
Club/Las Vegas (or is reasonably related to the operation of one or more of such
facilities, but is not also reasonably related to the operation of any other
facility).
Amendments to Loan Agreement. Effective as of the Effective Date, the
Loan Agreement is hereby amended in the following respects:
Reduction of Loan Commitment.
The definition of "Commitment" in Section 1.1 of the Loan Agreement is hereby
amended to read in full as follows:
"`Commitment' means, collectively, the lending commitment
hereunder of the Banks, as such commitment may be reduced or offset
under this Agreement. The percentage obligations of each Bank with
respect to the Commitment are as follows:
<TABLE>
<CAPTION>
Bank Amount Percentage
---- ------ ----------
<S> <C> <C>
Comerica Bank - California $15,000,000 100%"
</TABLE>
Section 2.1(a) of the Loan Agreement is hereby amended to read in full as
follows:
"(a) Subject to the terms and conditions set forth in this
Agreement, at any time and from time to time prior to the Maturity Date,
each Bank shall, pro rata according to that Bank's percentage of the
then Commitment, make Loans to Borrowers in such amounts as Borrowers
may request that do not exceed in the aggregate at any one time
outstanding the amount of the Commitment; provided that, Banks shall not
be obligated to make a Loan if, after giving effect to such Loan, the
Total Outstanding would exceed $15,000,000. Except as may otherwise be
payable on an earlier date as provided in Section 3.1, all Obligations
of Borrowers hereunder shall be due and payable on the Maturity Date.
Subject to the limitations set forth herein and in Section 3.1(e),
Borrowers may borrow, repay and reborrow under the Commitment without
premium or penalty."
Section 2.6(a) of the Loan Agreement is hereby amended to read in full as
follows:
"(a) Subject to the terms and conditions hereof, at any time and
from time to time from the Closing Date through the Banking Day
immediately preceding May 31, 2001 or other applicable Maturity Date,
the Issuing Bank shall issue such Standby Letters of Credit as a
Responsible Official of a Borrower on behalf of Borrowers may request by
a Request for Standby Letter of Credit; provided that, upon giving
effect to such Standby Letter of Credit, (i) Total Outstanding shall not
exceed $15,000,000 and (ii) Outstanding Standby Letters of Credit shall
not exceed the Maximum Standby Letter of Credit Amount. Unless
<PAGE> 4
the Requisite Banks otherwise consent in writing, the term of any
Standby Letter of Credit shall not exceed the Maturity Date. If on the
Maturity Date, 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 Banks in a face amount
equal to the 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."
Section 2.6(e) of the Loan Agreement is hereby amended to read in full as
follows:
"(e) At all times prior to the Maturity Date, if Borrowers fail
to make any payment required by Section 2.6(d), Agent may, but is not
required to, without notice to or the consent of Borrowers, make Loans
under the Commitment in an aggregate amount equal to the amount paid by
the Issuing Bank on the relevant Standby Letter of Credit, whether or
not the same would cause the Commitment to exceed $15,000,000, and, for
this purpose, the conditions precedent set forth in Article 8 and the
amount limitations set forth in Section 2.1(d) shall not apply. The
proceeds of such Loans shall be retained by the Issuing Bank to
reimburse it for the payment made by it under the Standby Letter of
Credit."
Irvine Environmental Resolution.
The definition of "Irvine Environmental Resolution" in Section 1.1 of the Loan
Agreement is deleted in its entirety.
The words "; and" in the final line of Section 8.2(g) of the Loan Agreement are
replaced with "." and Section 8.2(h) is deleted in its entirety.
Section 8.4 of the Loan Agreement is deleted in its entirety.
Amendments to Certain Financial Covenants.
The definition of "Debt Service Coverage Ratio" in Section 1.1 of the Loan
Agreement is amended to read in full as follows:
"`Debt Service Coverage Ratio' means, with respect to each applicable
fiscal period, the ratio of (i) EBITDA plus or minus, without double counting,
all non-recurring items of income or expense, plus Start-Up Revenue for that
fiscal period, to (ii) interest expense on all indebtedness, including
capitalized interest, plus the current portion of long term debt of Borrowers
for that fiscal period, minus interest income for that fiscal period, determined
in accordance with generally accepted accounting principles, consistently
applied. The Debt Service Coverage Ratio shall be determined as of the end of
each fiscal quarter of the Borrowers and their Subsidiaries, computed on a
rolling four quarter basis."
<PAGE> 5
The following new definition is hereby added to Section 1.1 of the Loan
Agreement in proper alphabetical order:
"`Start-Up Revenue' means, for any fiscal period, for Borrowers, their
Subsidiaries, and Sports Connection-ES/MB, to the extent of Borrowers' interest
therein, all revenues received in respect of a New Club Development prior to the
opening of the related new Club and treated as a deferred liability in
accordance of generally accepted accounting principles, consistently applied."
(a) Section 6.8 of the Loan Agreement is amended by deleting the
number "$20,200,000" in the ninth line thereof and substituting therefor the
number "$24,500,000."
(b) Section 6.12 of the Loan Agreement is amended by adding the
words "beginning in the fiscal year commencing January 1, 2000" after the words
"in any fiscal year" in the third line thereof and by deleting the words "five
percent (5%)" in the third line thereof and substituting therefor the words "six
percent (6%)".
Section 6.15 of the Loan Agreement is hereby deleted and replaced in its
entirety with the following:
"6.15 Debt Service Coverage Ratio. For Borrowers and their
Subsidiaries, permit the Debt Service Coverage Ratio to be less than (a)
1.35:1.00 for any fiscal quarter to and including the fiscal quarter
ending September 30, 2000; and (b) 1.75:1.00 for any fiscal quarter
ending thereafter, with such ratio to be calculated at the end of each
such fiscal quarter, on a rolling four quarter basis."
Release of Canoga Agoura Spectrum Club, Inc. as Collateral.
The following definitions in Section 1.1 of the Loan Agreement are hereby
amended to read in full as follows:
"`Deeds of Trust' means, collectively, the Deed of Trust,
Security Agreement and Fixture Filing (With Assignment of Rents and
Leases) executed by each of Irvine Sports Club, Inc. and Green Valley
Spectrum Club, Inc. in favor of Agent for the ratable benefit of Banks,
in the forms of those attached hereto as Exhibits B-1 and B-3, as the
same may from time to time hereafter be supplemented, modified, amended,
restated or extended."
"`Security Agreements (All Assets)' means, collectively, the
Security Agreement (All Assets) executed by each of Irvine Sports Club,
Inc. and Green Valley Spectrum Club, Inc. in favor of Agent, for the
ratable benefit of Banks, in the forms of those attached hereto as
Exhibits H-1 and H-3, as the same may from time to time hereafter be
supplemented, modified, amended, restated or extended."
The definitions of "The Spectrum Club/Agoura Hills" and "The Spectrum
Club/Canoga Park" in Section 1.1 of the Loan Agreement are deleted in their
entirety.
<PAGE> 6
Sections 4.5(b), 5.11, 6.16, 6.20 and 11.11 are amended to delete any and all
occurrences of the terms "Canoga Agoura Spectrum Club, Inc.," "The Spectrum
Club/Agoura Hills" and "The Spectrum Club/Canoga Park."
Exhibits B-2: Form of Deed of Trust (Canoga Agoura) and H-2: Form of Security
Agreement (All Assets) (Canoga Agoura) are deleted in their entirety.
Establishment of Accounts. Section 5.11 of the Loan Agreement is amended by
deleting the words "ninety (90) days following the execution of this Agreement"
in the first and second lines thereof and substituting therefor the words
"December 31, 1999."
General Amendment. Effective as of the Effective Date, the Loan Agreement and
all other Loan Documents are hereby amended to the further extent required to
give effect to the terms and conditions of the amendments to the Loan Agreement
effected pursuant to Section 3 above. In furtherance of the foregoing, the legal
descriptions of Property 1 and Property 2 are deleted as of the Effective Date
from Exhibit "A" to the Environmental Indemnity.
Full Force and Effect. Effective as of the Effective Date, each of the Loan
Documents is hereby amended such that all references to the Loan Agreement
contained in any such documents shall be deemed to be references to the Loan
Agreement, as amended by this Amendment. Except as amended hereby, the Loan
Agreement and the other Loan Documents shall remain unaltered and in full force
and effect.
Conditions Precedent. The satisfaction of the following shall be conditions
precedent for the benefit of the Agent and the Bank to the effectiveness of this
Amendment:
1.2 Sale of Agoura Hills and Canoga Park Spectrum Clubs. The
sale of The Spectrum Clubs/Agoura Hills and The Spectrum Club/Canoga Park to
Racquetball and Fitness Clubs, Inc. pursuant to the Stock Purchase Agreement
shall have been consummated.
1.3 Restructuring Fee. The Borrowers shall have paid to the
Agent a restructuring fee in the amount of Ten Thousand Dollars ($10,000).
Schedules 4.4, 4.10 and 4.17. The Borrower shall have delivered to the Agent a
revised version of Schedules 4.4, 4.10 and 4.17 to the Loan Agreement, updated
to the Effective Date.
Amended and Restated Revolving Loan Note. The Agent shall have received an
Amended and Restated Revolving Loan Note in the form of Exhibit "A" to this
Amendment duly executed by each of the Borrowers.
Reaffirmation of Intercreditor Agreement. The Agent shall have received a
Reaffirmation of Intercreditor Agreement in the form of Exhibit "B" to this
Amendment duly executed by each of the parties to the same.
Solvency Certificates. The Agent shall have received Solvency Certificates in
the form of Exhibit "C" to this Amendment executed by the chief financial
officers of Irvine Sports Club, Inc. and Green Valley Spectrum Club, Inc.
Amended and Restated Contribution Agreement. The Agent shall have received an
Amended and Restated Contribution Agreement in the form of Exhibit "D" to this
Amendment duly executed by the chief financial officers of Irvine Sports Club,
Inc. and Green Valley Spectrum Club, Inc.
1.4 Corporate Documents. The Agent shall have received (a) a
certificate of an officer of each Borrower to the effect that such Borrower is
in compliance in all material respects with all material requirements of
applicable law; (b) a certificate of the chief financial officer of each
Borrower stating that, after giving effect to the modifications to the Loan
Agreement effected herein, as of the Effective Date no Default or Event of
Default shall have occurred and be continuing on the Effective Date; and (c)
such additional approvals, documents
<PAGE> 7
and other information, in form and substance satisfactory to the Agent, as the
Agent may reasonably request.
Bank Expenses. All legal fees, costs and other expenses which the Agent and the
Bank have incurred in connection with this Amendment as of the Effective Date
but which have not previously been reimbursed by the Borrowers shall have been
so reimbursed by the Borrowers.
Waiver of Debt Service Coverage Ratio Default. Effective as of the Effective
Date, the Agent and the Bank hereby waive the requirement that the Borrowers
comply with Section 6.15(a) of the Loan Agreement with respect to the fiscal
quarter ended September 30, 1999. This waiver is strictly limited as provided
above and shall not extend to any fiscal quarter other than that ended September
30, 1999 or to any other matter or transaction, other than the express waiver
reflected in the immediately preceding sentence. Except for the matter waived in
that sentence or as otherwise amended by this Amendment, all terms and
conditions set forth in the Loan Agreement and the other Loan Documents are
unchanged and remain in full force and effect. Each of the Agent and the Bank
reserve all of its powers, rights, remedies, claims, causes of action, defenses
and privileges under or in respect of the Loan Agreement and the other Loan
Documents. Each of the Borrowers acknowledges that neither the consent reflected
in this Section 7 nor the Agent's or the Bank's present awareness of the
existence of any Default or Event of Default: (a) imposes any obligation on the
Agent or any Bank to defer the enforcement of its powers, rights, remedies,
claims, causes of action, defenses or privileges under the Loan Agreement or any
of the Loan Documents, such enforcement action to be taken in the sole
discretion of the Agent and/or the Banks, as the case may be, when it or they
determine that is appropriate to do so; or (b) shall affect or diminish any
Borrower's obligation to comply with any other term or provision of the Loan
Agreement or any of the Loan Documents.
2. Representations and Warranties. Each Borrower hereby represents and
warrants to the Agent and the Bank that each representation and warranty made by
it in Article IV of the Loan Agreement and each representation and warranty made
by it in each other Loan Document is true and correct on and as of the Effective
Date as though made as of the Effective Date, except to the extent such
representations and warranties relate solely to an earlier date.
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.
Governing Law. This Amendment shall be governed by, and construed in accordance
with, the laws of the State of California.
[Remainder of page intentionally left blank; signatures follow]
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Amendment by
their respective duly authorized officers as of the date first above written.
BORROWERS:
THE SPORTS CLUB COMPANY, INC. THE SPECTRUM CLUB COMPANY,
A Delaware corporation INC., a California corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
-------------------------------------- --------------------------------
Timothy O'Brien Timothy O'Brien
Its: Chief Financial Officer Its: Chief Financial Officer
<PAGE> 9
<TABLE>
<S> <C>
PONTIUS REALTY, INC. LA/IRVINE SPORTS CLUBS, LTD.
a California corporation a California limited partnership
By: Sports Club, Inc. of California, general partner
By: /s/ Timothy O'Brien
--------------------------------------
Timothy O'Brien
Its: Chief Financial Officer By: /s/ Timothy O'Brien
----------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
SPORTS CLUB, NC. OF CALIFORNIA, TALLA NEW YORK, INC.,
A California corporation a New York corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
-------------------------------------- ----------------------------------------
Timothy O'Brien Timothy O'Brien
Its: Chief Financial Officer Its: Chief Financial Officer
TVE, INC., SPECTRUM CLUB ANAHEIM,
a California corporation a California Corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
-------------------------------------- ----------------------------------------
Timothy O'Brien Timothy O'Brien
Its: Chief Financial Officer Its: Chief Financial Officer
IRVINE SPORTS CLUB, INC., GREEN VALLEY SPECTRUM CLUB,
a California corporation INC., a Nevada corporation
By: /s/ Timothy O'Brien By: /s/ Timothy O'Brien
-------------------------------------- ----------------------------------------
Timothy O'Brien Timothy O'Brien
Its: Chief Financial Officer Its: Chief Financial Officer
THE SPORTSMED COMPANY, INC.
a California corporation
By: /s/ Timothy O'Brien
--------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
</TABLE>
<PAGE> 10
CANOGA AGOURA SPECTRUM CLUB,
INC., a California corporation
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
SCC SPORTS CLUB, INC.,
a Texas corporation
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
SPECTRUM LIQUIDATING CORPORATION,
a California corporation,
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
HFA SERVICES, INC.
a California corporation,
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
NY SPORTS CLUB, INC.
a Delaware corporation
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
<PAGE> 11
SF SPORTS CLUB, INC.,
a Delaware corporation
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
WASHINGTON D.C. SPORTS CLUB, INC.,
a Delaware corporation,
By: /s/ Timothy O'Brien
---------------------------------------
Timothy O'Brien
Its: Chief Financial Officer
AGENT:
COMERICA BANK-CALIFORNIA
a California banking corporation, as Agent
By: /s/ Joseph Yurosek
---------------------------------------
Joseph Yurosek
Vice President
COMERICA BANK-CALIFORNIA,
a California banking corporation
By: /s/ Joseph Yurosek
---------------------------------------
Joseph Yurosek
Vice President
<PAGE> 1
EXHIBIT 10.78
Form of The Sports Club Membership Agreement
<PAGE> 2
EXHIBIT 10.78
-----------------------------------------
MEMBERSHIP VALID ONLY AT:
CLUB
-------------------------------------
MEMBER SIGNATURE
-------------------------
1835 SEPULVEDA BLVD. O LOS ANGELES, CALIFORNIA 90025 O (310) 473-1447
MEMBERSHIP AGREEMENT
This Membership Agreement ("Agreement") for the type of membership indicated
below, is between The Sports Club/LA ("Club") and its affiliated Clubs which
applicant may visit from time to time and utilize facilities, equipment or
services therein, pursuant to the terms of this Agreement, and the undersigned
applicant ("Applicant"). By signing this Agreement, I acknowledge that I have
received and read a copy of the Bylaws of the Club and a completed copy of this
Agreement. I agree that I will be bound by the provisions on the face of this
Agreement, the additional provisions on the reverse, the Bylaws of the Club, as
now in effect and as from time to time amended by the Club, and such rules as
may from time to time be posted at the Club, all of which are incorporated by
reference in this Agreement. I also understand that the Club in which this
Agreement is executed will hereby be considered my Home Club and the laws
governing this Agreement shall be that of the state in which my Home Club is
located.
1. INITIATION FEE PAYMENTS. You are required to pay an initiation fee or $
____________ per month for ________ months beginning on the date you join and on
the first day of each month thereafter. Each installment of the initiation fee
in non-refundable once paid, however, if you elect to cancel your membership at
any time before paying all installments of the initiation fee, you will not be
required to pay any installments which are due on or after the date you notify
us of your election to cancel your membership.
2. MONTHLY DUES. Your monthly dues are $ ____________, subject to increase as
describe in Section 7. You agree to pay on the date of this application, in
advance, membership dues for the first and last month of your membership (your
first month membership dues will be prorated for the period from the date you
join until the end of the month). Thereafter, you agree to pay dues, in advance,
on the first day of each month, until your membership is terminated in
accordance with the terms of this Agreement.
3. MEMBERSHIP. Your membership is a contractual privilege to use the facilities
from time to time offered by the Club to members of your class of membership
during the Club's hours of operation. The Club reserves the absolute right to
initiate, change or eliminate facilities, services and programs offered from
time to time; to initiate, change or eliminate fees for existing or new
facilities, services and programs; and to change its hours of operation. Your
membership does not entitle you to any interest in the Club or its property and
confers no right to participate in the management or operation of the Club.
4. CLASS OF MEMBERSHIP. Your membership class is: __________Individual
__________Add On __________Dependent __________Corporate
An individual membership is defined as a membership for one person whether
married or not. An Add On membership is defined as a membership for one person
who is the spouse or domestic partner of an existing member (primary member)
paying Individual dues rates of the Club. The Club requires documentation of
marital or domestic partnership status. A Dependent membership is defined as a
membership for one person who is the dependent, age 15 through 20, of and living
at home with two existing Club members. The initiation fee and dues of an Add On
or Dependent member are reduced. In the event the primary member terminates
his/her membership at the Club or the spousal or domestic partner relationship
between two members is terminated, the Add On dues rate will revert to the
prevailing Individual dues rate for that membership type. In the event the
primary member terminates his/her membership at the Club, Dependents will revert
to the prevailing Individual dues rate for that membership type. In the event
the primary member and Add On member terminate their memberships at the Club,
Dependents will revert to the prevailing Individual dues rate for that
membership type. At age 21 (upon 21st birthday), the Dependent dues rate will
revert to the prevailing Individual dues rate for that membership type. Dues
rates will be adjusted at the end of the prepaid term of membership for annual
members or the next Checkfree collection date for monthly dues members.
A Corporate membership is defined as a membership for one person which is
purchased in a group of a minimum of five memberships at the same time and the
initiation fee and monthly dues are paid by a corporation. The Club requires
documentation of employee status. A Corporate membership may be transferred from
one designated holder to another onetime per year by providing 30 days advance
written notice and upon payment of a transfer fee of $__________.
5. TYPE OF MEMBERSHIP. Your membership type is: ________Executive ________
Health ________Bicoastal _______ One Club
Executive members are entitled to use and enjoy the facilities and perquisites
of the Club as announced from time to time by the Club. Health members are
entitled to use and enjoy the facilities of the Club except the Executive
perquisites.
6. USE OF OTHER SPORTS CLUBS. Use of other affiliates of the Club, existing or
future, may be restricted or subject to additional fees. Bicoastal members are
entitled to use and enjoy the facilities of existing Sports Clubs subject to the
restrictions detailed in the above paragraph. One Club members are entitled to
use and enjoy the facilities only of the Club at which their membership was
purchased, subject to the restrictions detailed in the above paragraph.
7. DUES AND OTHER CHARGES. Except for your initial payment, all initiation fees
and monthly dues must be paid through Checkfree electronic funds transfer
program on the first day of each month of your membership. Dues for the month in
which you join will be prorated and are due in advance at the time of
application along with all other amounts then due. If the Club at its sole
discretion extends charge privileges to you, you agree to pay all the charges
through Checkfree. All Club invoices of any kind are considered due and payable
upon receipt. You agree to sign and deliver such further documents as may be
necessary to set up the payment of your dues and other charges through
Checkfree. You authorize the Club to utilize Checkfree for collection of past
due balances. Any change in Checkfree account information must be received by
the 10th of the current month in order to charge the new account and prevent
charges to the old account in the following month. The Club reserves the right
to replace Checkfree with other such electronic funds transfer programs for the
collection of your dues and other charges. The Club reserves the absolute right
to increase your dues.
If any payment of dues or other charges is not made on time, the Club may, but
is not obligated to, cancel your membership by giving you notice of such
cancellation. You shall immediately surrender your copy of this Agreement and
your membership card to the Club. The Club may assess late payment fees and
suspend charge privileges. If the Club has to take action to collect any amounts
due from you, you agree to pay all costs of such action including, but not
limited to, attorney fees, returned check charges, and administrative costs.
I HAVE READ, UNDERSTAND AND RECEIVED A COMPLETE COPY OF THIS AGREEMENT, THE
EXPRESS ASSUMPTION OF RISK SECTION HEREOF, AND THE BYLAWS OF THE CLUB WHICH ARE
INCORPORATED HEREIN BY REFERENCE, AND I AGREE TO BE BOUND BY THEIR TERMS AND
CONDITIONS. THE LAWS GOVERNING THIS AGREEMENT WILL BE THAT OF THE STATE WHERE
THIS AGREEMENT IS EXECUTED.
Print Name:
--------------------------------------------------------------------
Member's Signature Date:
---------------------------- ---------------------------
The Sports Club/LA By: Date:
------------------------ ---------------------------
THREE-DAY RIGHT TO CANCEL. You, the Buyer, may cancel this agreement at any
time prior to midnight on the third business day (of the Club) after the
date of this agreement, excluding Sundays and holidays. To cancel this
agreement, mail or deliver your copy of this agreement and a signed and
dated notice, or send a telegram which states that you, the buyer, are
canceling this agreement, or words of similar effect. Such notice shall be
send to The Sports Club/LA, 1835 Sepulveda Blvd., Los Angeles, CA 90025.
<PAGE> 3
8. CANCELLATION. You can cancel your membership by giving 30 days advance
written notification to the Club, surrendering your copy of this Agreement and
your membership card, and paying all unpaid dues and other charges owed the
Club. Such cancellation shall not be deemed effective until after the expiration
of the 30 day notice period, receipt of your copy of this Agreement and your
membership card, and all required payments have been made to the Club. You will
remain liable for payment of dues for periods prior to the effective
cancellation date. If your membership is cancelled and at a later date you elect
to rejoin the Club, you will be required to pay the them current initiation fee
and dues rate for your class and type of membership.
If Member moves farther than 25 miles from the Club, is unable to transfer his
or her membership to a comparable facility, and desires to terminate membership,
Member may terminate membership immediately by written notice to the Club, and
if Member has prepaid any sums for services, so much sum is allocable to periods
following termination, less any charges against Member's account, will be
promptly refunded.
If you cancel your membership in accordance with the terms of this section
during a year for which you have prepaid membership dues, the Club will refund
your prepaid dues for the membership time not used. Any such refund will not
include dues for membership time prior to the date of your cancellation or for
the notice period required by this section. No refund will be given for any
period of time granted you on a non-cash basis. Any sums due from you at the
time of cancellation may be deducted from any refund due to you. Until the Club
has been notified of the cancellation of your membership in accordance with the
terms of this section, your copy of the Agreement and your membership card have
been surrendered, and all required payments have been made in accordance with
the terms of this section, dues will continue to be charged to your account
thereby reducing any refund of prepaid dues.
The Club can cancel your membership at any time for any breach of this Agreement
or for any violation of the Bylaws of the Club by giving you notice of such
cancellation. The Club can also cancel your membership at any time without cause
by giving you notice of such cancellation. If the Club cancels your membership,
you must immediately surrender your copy of this Agreement and your membership
card. You will remain liable for all unpaid dues owed and any other charges
against your account. You will be entitled to a refund of any prepaid dues upon
compliance with the conditions described above.
No refunds shall be made for membership dues except as specifically provided for
in this Agreement. Under no circumstances will refunds of dues be made
retroactively due to failure to use the Club facilities.
9. TRANSFERABILITY. Except as provided in the case of Corporate memberships,
your membership is non-transferable, non-assignable and non-voting.
10. RELEASE, WAIVER OF LIABILITY & INDEMNIFICATION AGREEMENT. You, on behalf of
yourself and any dependent(s), represent and agree as follows: (a) that you
understand that the use of the Club's facilities, equipment, services, programs
and premises includes an inherent risk of injury to persons and property; (b)
that you are in good physical condition and have no disabilities, diseases,
illnesses or other conditions that could prevent you from exercising and using
the Club's facilities without injuring yourself or impairing your health; and
(c) that you have consulted a physician concerning an exercise program that will
not expose you to risk of injury or impairment to your health and that your
physician has approved your contemplated activities at the Club. You understand
that risk of injury includes, but is not limited to, injuries arising from or
relating to the use by you or your dependents(s) or others of exercise equipment
and machines, locker rooms, spa and other wet areas and other Club facilities;
injuries arising from or relating to participation by you or others in
supervised and unsupervised activities or programs throughout the Club; injuries
and medical disorders arising from or relating to the use of the Club's
facilities such as heart attack, stroke, death, heat stress, sprains, strains,
broken bones, and torn muscles, tendons and ligaments among others; and
accidental injuries occurring anywhere in the Club, including lobbies, hallways,
exercise areas, locker rooms, steam rooms, pool areas, Jacuzzis, sauna, and
dressing rooms or activities associated with the Club which are carried on
anywhere or while you are traveling to or from the Club. Accidental injuries
include those caused by you, those caused by other persons and those of a slip
and fall nature. If you have any special exercise requirements or limitations,
you agree to disclose them to the Club before using the Club's facilities or
when seeking help in establishing or carrying on an exercise program. You hereby
agree that all exercises and use of Club facilities, equipment and services,
programs and premises are undertaken by you at your sole risk. By your execution
hereof, you hereby waive all claims which you or any dependent may have
hereafter against the Club, and do hereby release the Club on your behalf and on
behalf of any dependents, and agree to hold the Club absolutely harmless from
all claims, demand, injuries, damages, actions, suits, or causes of action to
persons or property, arising out of or in any way connected with you or your
dependent's use of the Club facilities, premises, equipment, services or
programs, including those arising out of any active or passive negligent act or
omission of the Club, except as to such which may arise from the gross
negligence or willful misconduct of the Club. You do hereby further agree and do
hereby, on behalf or yourself and any dependents, to assume full responsibility
for all risks of bodily injury, death or property damage due to the negligent
act or omission of the club. If you agree, understand and fully appreciate this
Release, Waiver of Liability and Indemnification Agreement, Initial
here_______________.
11. LOSS OR THEFT OF MEMBER PROPERTY. The Club is not responsible or lost or
stolen articles. You should keep any valuables with you at all times while using
the facilities. Storage spaces or lockers do not always protect valuables.
Initial_______________.
12. DEATH OR DISABILITY. If, by reason of death or disability, Member is unable
to receive all services for which Member has contracted, Member and his or her
estate shall be relieved from the obligation or making payments for services
other than those received prior to death or the onset of disability. If Member
has prepaid any sums for services, so much of said sum as is allocable to
services Member has not taken shall be promptly refunded to Member, or to
Member's representative. In cases of disability where a retroactive request for
refund of dues is made, both the disability and date of onset must be verified
in writing by your physician. Requests for retroactive dues refunds due to
disability will not be honored for any time period in which your membership
account shows utilization of Club facilities.
13. LEAVE OF ABSENCE. The club may, upon your request and at its sole
discretion, grant you a leave of absence if you are going to be unable to use
the Club for a period to time. Your request must (a) be in writing, (b) be
received by the membership office of the Club at least 30 days before the
requested leave is to begin, (c) set forth the period requested for the leave of
absence (minimum of two months, maximum of six months), (d) state in detail the
reason for the requested leave of absence. You must surrender you membership
card to the Club before the start of the leave of absence. You agree to pay
reduced monthly dues during the leave period at the rate set forth by the Club.
The Club will not grant the leave of absence unless you are current on all dues
and other charges against your account, and you have not been on a leave of
absence at any time during the 24 months before the start of the requested leave
of absence.
During the leave of absence, you will not be entitled to use any of the
facilities, premises, services or programs of any Sports Club. Your membership
will be automatically reactivated by the Club at the end of the leave of absence
period granted Your card will then be available to you and your access to the
Club restored provided you are current on all dues and other charges against
your account.
In addition to the above conditions, leaves of absence for medical reasons must
be accompanied by a physician's note detailing why and for what period of time
you will not be able to utilize the Club facilities. At the end of the requested
leave period, you must provide a physician's note stating that you are capable
of resuming a program of physical exercise. Leaves of absence will not be
granted on a retroactive basis.
14. BYLAWS. The Club reserves the absolute right to change the Club's Bylaws.
All signs posted in the Club shall be considered part of the Bylaws. Members and
their guests shall be bound by the Bylaws of the Club. Bylaws may be revised,
supplemented, or amended at the sole discretion of the Club, as deemed necessary
for the proper management of the Club. THESE BYLAWS SHALL BE CONSIDERED A PART
OF THE MEMBERSHIP AGREEMENT.
15. TIME OF ESSENCE. Time is of the essence of each provision of this Agreement.
16. NOTICE. Any notice required or permitted to be given to you shall be
considered duly given when personally delivered to you or mailed to your address
as it appears on the Membership Application or as subsequently changed by
written notice to the Club. Any notice required or permitted to be given by you
to the Club shall be considered duly given only when received in writing by the
Membership Office of the Club.
17. SEVERABILITY. If any provision or any part of any provision of this
Agreement is held unenforceable, such unenforceability shall not affect the
other provisions, or the other parts of such provisions, of this Agreement.
18. STEROID USE. WARNING: USE OF STEROIDS TO INCREASE STRENGTH OR GROWTH CAN
CAUSE SERIOUS HEART PROBLEMS. STEROIDS CAN KEEP TEENAGERS FROM GROWING TO THEIR
FULL HEIGHT: THEY CAN ALSO CAUSE HEART DISEASE, STROKE, AND DAMAGE LIVER
FUNCTION. MEN AND WOMEN USING STEROIDS MAY DEVELOP FERTILITY PROBLEMS,
PERSONALITY CHANGES AND ACNE. MEN CAN ALSO EXPERIENCE PREMATURE BALDING AND
DEVELOPMENT OF BREAST TISSUE. THESE HEALTH HAZARDS ARE IN ADDITION TO THE CIVIL
AND CRIMINAL PENALTIES FOR UNAUTHORIZED SALE, USE OR EXCHANGE OF ANABOLIC
STEROIDS.
19. ENTIRE AGREEMENT AND MODIFICATION. This Agreement when accepted by the Club,
will constitute the entire agreement between you and the Club relative to your
membership. You acknowledge that no other agreement exists between you and the
Club relative to your membership and that no representations, other than those
set forth in the Agreement have been made to you to induce you to make this
Agreement. Your Agreement with the Club can be modified only in writing, prior
to the Club's acceptance of your Agreement, by the Manager of the Club, and can
be terminated only as set forth in the Agreement. You, the undersigned, further
expressly agree that the foregoing Agreement, including the Release, Waiver of
Liability and Indemnification Agreement is intended to be as broad and inclusive
as permitted by the laws of the state(s) wherein the Club operates, that it
shall apply to any period of membership or any prior or subsequent membership
period of yours and / or any dependent, and to any period during which you and /
or any dependents use Club facilities. Initial:_______________.
<PAGE> 1
EXHIBIT 10.79
Transition Services Agreement dated December 3, 1999 by and among
Registrant and Spectrum Clubs, Inc.
<PAGE> 2
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT (this "Agreement") is made as of December 3,
1999, by and among The Sports Club Company, Inc., a Delaware corporation
("Parent") and Spectrum Clubs, Inc., a Texas corporation formerly named as
Racquetball & Fitness Clubs, Inc. ("Buyer"). Parent and Buyer are referred to
herein collectively as the "Parties" and individually as a "Party."
W I T N E S S E T H :
WHEREAS, pursuant to that certain Stock Purchase Agreement (the "Purchase
Agreement"), dated as of September 16, 1999, as amended, by and among Buyer,
Parent, The Spectrum Club Company, Inc., ("Spectrum"), Canoga/Agoura Spectrum
Club, Inc., Spectrum Club Anaheim, El Segundo-TDC, Ltd., and TVE, Inc. (all such
entities except Buyer being collectively called the "Sellers" and individually
each a "Seller"), Buyer is purchasing from Sellers the stock of Newco (as
defined in the Purchase Agreement); and
WHEREAS, Buyer desires that, after the Closing, Parent provide to Buyer or an
Affiliate of Buyer certain administrative, corporate and other services on a
transitional basis; and
WHEREAS, capitalized terms used herein and not otherwise defined herein have the
meanings given to such terms in the Purchase Agreement;
NOW, THEREFORE, in consideration of the premises and covenants set forth herein
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Parties hereby agree as follows:
Transition Services. Upon the terms and subject to the conditions set forth in
this Agreement, during the term of this Agreement as set forth in Section 4
below (the "Transition Period"), Parent shall provide to Buyer or its
Affiliates, from the date of this Agreement and for a period of two hundred
seventy (270) days thereafter (subject to extension as set forth in Section 4
below), the respective services set forth on Annex A attached hereto (the
"Services"). The Services will be provided in the manner, within the time frames
and at a level of service consistent with that provided to Sellers by Parent
and/or its Affiliates with respect to the Business prior to the date hereof.
Such Services shall be provided at the cost specified beside each category of
Service on Annex A.
Billing and Payment. On the 15th and the last day of each calendar month, Buyer
shall pay half of the monthly payment for Services for the coming month. If in
connection with performing Services, Parent incurs any direct costs not included
in Annex A hereto, Parent shall deliver Buyer monthly invoices for such costs
incurred . All invoices shall be paid not later than thirty (30) days following
receipt, subject to receiving from Parent, if reasonably requested by Buyer, any
appropriate support documentation for such invoices. All payments to Parent
shall be made by wire transfer in accordance with written instructions provided
by Parent. Without limitation, examples of direct costs include (i) costs of
newsletter publication, newspaper advertising, directory listings, public
relations agency fees and related print and supplies expenses, (ii) costs for
building operations supplies and sundries not maintained at the club level, and
(iii) costs of logo wear. Direct costs also include out-of-pocket expenses paid
to third parties consistent with past practices for services outside the normal
course, which services are incurred solely for Buyer's benefit. Direct costs do
not include outsourcing of any function currently performed by personnel of
Parent or one of its affiliates. Prior to incurring direct costs in excess of
$5,000,
<PAGE> 3
Parent shall obtain written approval from Buyer.
Services requiring use of checks issued by Parent or other fund transfers by
Parent on behalf of Buyer will be provided only to the extent funded by a Buyer
account or to the extent that Buyer provides Parent with immediately available
funds prior to Parent's issuance of the check or the fund transfer, as the case
may be.
Validity of Documents. The Parties shall be entitled to rely upon the
genuineness, validity or truthfulness of any document, instrument or other
writing presented in connection with this Agreement unless such document,
instrument or other writing appears on its face to be fraudulent, false or
forged.
Term of Agreement. The term of this Agreement shall commence on the date hereof
and shall continue (unless sooner terminated pursuant to the terms hereof) for a
period of 270 days; provided that by written notice at least thirty (30)
business days prior to the 270th day, Buyer may request (on a per Service basis)
the continuation of all or any portion of the Services for up to an additional
90 days. If Buyer requests continuation of a Service for less than 90 days,
Buyer may later extend such request up to the full 90 days or any part thereof.
Any period during which Buyer requests continuation after the 270th day is
called the "Continuation Period").
Partial Termination. Any or all of the Services provided hereunder are
terminable at any time by Buyer on thirty (30) business days prior written
notice to Parent. Even if a particular Service is terminated by Buyer, Parent
will continue to interact with and provide access to Buyer to the extent that
Services still being provided are related to the terminated Service. For
example, if Buyer terminates payroll services but is still receiving human
resources services from Parent, Parent will continue to allow Buyer's payroll
department to interact with Parent's human resources department to the extent
necessary to allow both Services to function smoothly.
Access. With respect to each Service provided by Parent or any of its Affiliates
hereunder, Buyer and Parent shall provide the other Party and its personnel with
access to the equipment, office and storage space and systems relating to such
Service during normal business hours for the term of this Agreement to the
extent reasonably required in connection with the provision of such Services
hereunder; provided that such access shall be supervised by the appropriate
personnel of the Parties and shall be done in a manner so as to minimize the
interruption of the Parties' normal business operations.
Assignment. This Agreement shall not be assignable in whole or in part by any
Party hereto, nor may a Party delegate performance of its obligations hereunder,
without the prior written consent of the other Parties hereto, such consent not
to be unreasonably withheld in the case of a proposed transfer/delegation to an
Affiliate (with consideration given, in the case of a proposed
assignment/delegation by Parent, to whether the assignee/delegate has the
personnel available to perform the Services). Buyer may also assign its interest
in this Agreement to the extent that assignments of contract rights are required
by Buyer's lenders as security, to Buyer's lenders. Subject to the foregoing,
this Agreement shall be binding on, and shall inure to the benefit of and be
enforceable by, the Parties and their respective successors, permitted assigns
and legal representatives.
Confidentiality. Each Party shall cause each of its Affiliates and each of their
respective officers, directors, employees, consultants and agents to hold all
information relating to the business of the other Parties disclosed to it by
reason of this Agreement confidential and will not disclose any of such
information to any person or entity unless legally compelled to disclose such
information, provided, however, that to the extent that any of them may become
so legally
<PAGE> 4
compelled they may only disclose such information if they shall first have used
reasonable efforts to, and, if practicable, shall have afforded the other
Parties the opportunity to, obtain an appropriate protective order or other
satisfactory assurance of confidential treatment for the information required to
be so disclosed.
Governing Law. This Agreement shall be governed by and construed in accordance
with the internal laws of the State of California applicable to agreements made
and to be performed entirely within such State, without regard to the conflicts
of law principles of such State.
Indemnification. Except with respect to claims by Buyer against Parent for
breach of this Agreement, Buyer agrees to indemnify and hold harmless Parent and
each of its Affiliates and Representatives (the "Parent Indemnified Parties") to
the fullest extent lawful, harmless from and against any and all losses, claims,
damages, liabilities, costs (including without limitation reasonable attorneys'
fees) and expenses (including without limitation costs and expenses incurred in
connection with investigation, preparing, pursuing or defending against any of
the foregoing) (collectively "Losses"), as incurred, relating to, based on or
arising out of the performance by the Parent Indemnified Parties of the duties
of Parent hereunder, provided that Buyer shall not be liable to any Parent
Indemnified Party for any Losses to the extent that such Losses are caused by
the breach of this Agreement by an Indemnified Party or by the negligence or
willful misconduct of a Parent Indemnified Party.
Except with respect to claims by Parent against Buyer for breach of this
Agreement, Parent agrees to indemnify and hold harmless Buyer and each of its
Affiliates and Representatives (the "Buyer Indemnified Parties") to the fullest
extent lawful, harmless from and against any and all losses, claims, damages,
liabilities, costs (including without limitation reasonable attorneys' fees) and
expenses (including without limitation costs and expenses incurred in connection
with investigation, preparing, pursuing or defending against any of the
foregoing) (collectively "Losses"), as incurred, relating to, based on or
arising out of the breach of this Agreement by Parent or Parent's negligence or
willful misconduct, provided that Parent shall not be liable to any Buyer
Indemnified Party for any Losses to the extent that such Losses are caused by
the breach of this Agreement by any Buyer Indemnified Party or by the negligence
or willful misconduct of a Buyer Indemnified Party.
Counterparts. This Agreement may be executed in one or more counterparts
(including by means of telecopied signature pages), all of which shall be
considered one and the same Agreement, and shall become effective when one or
more counterparts have been signed by each of the Parties and delivered to the
other Parties.
Notices. Unless otherwise indicated herein, all notices, requests, demands or
other communications to Parent and Buyer shall be deemed to have been given or
made three business days after being deposited in the mails, registered or
certified mail, return receipt requested, postage prepaid, or when delivered by
means of overnight delivery service or messenger, addressed to the Party to be
notified, or by facsimile to Parent or Buyer at the following address:
To Parent: The Sports Club Company, Inc.
11100 Santa Monica Boulevard
Suite 300
Los Angeles, CA 90025-3384
Attention: John Gibbons
Fax No. (310) 479-5740
Copy to: Kinsella, Boesch, Fujikawa & Towle, LLP
1901 Avenue of the Stars
Los Angeles, CA 90067
<PAGE> 5
Attention: Ronald K. Fujikawa, Esq.
Fax No. (310) 284-6018
To Buyer: Racquetball & Fitness Clubs, Inc.
c/o Brentwood Associates
11150 Santa Monica Boulevard
Los Angeles, CA 90025
Attention: Edward McCall
Fax No.: (310) 477-1011
Copy to: Latham & Watkins
633 West 5th Street
Los Angeles, CA 90071
Attention: Elizabeth A. Blendell, Esq.
Fax No.: (213) 891-8763
Modification, Nonwaiver, Severability. Neither this Agreement nor any part
hereof may be changed, altered or amended orally. Any modification must be by
written instrument signed by Parent and Buyer. Failure by any Party to exercise
promptly any right granted herein or to require strict performance of any
obligation imposed hereunder shall not be deemed a waiver of such right. If any
provision of this Agreement is held ineffective for any reason, the other
provisions shall remain effective.
Interpretation. The headings and captions contained in this Agreement and in
Annex A attached hereto are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Agreement. The use of the word
"including" herein shall mean "including without limitation."
No Strict Construction. The language used in this Agreement shall be deemed to
be the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any person or entity.
Entire Agreement. This Agreement (including Annex "A" hereto) and the Purchase
Agreement contain the entire agreement and understanding among the Parties
hereto with respect to the subject matter hereof and supersede all prior and
contemporaneous agreements, negotiations and understandings, whether written or
oral, relating to such subject matter.
Relationship of Parties. Except as specifically provided herein, none of the
Parties shall act or represent or hold itself out as having authority to act as
an agent or partner of any other Party, or in any way bind or commit any other
Party to any obligations. Nothing contained in this Agreement shall be construed
as creating a partnership, joint venture, agency, trust or other association of
any kind, each Party being individually responsible only for its obligations as
set forth in this Agreement.
Attorneys' Fees. If either Party shall initiate any Action to enforce or
interpret any term or provisions hereof, the Party prevailing in such Action
shall be entitled to its reasonable attorneys' fees and disbursements from the
non-prevailing party.
<PAGE> 6
IN WITNESS WHEREOF, the Parties have caused this Transition Services Agreement
to be executed by their duly authorized representatives as of the date and year
first set forth above.
THE SPORTS CLUB COMPANY, INC.
By: /s/ John M. Gibbons
---------------------------------
Title: Chief Executive Officer
SPECTRUM CLUBS, INC., f/k/a
RACQUETBALL & FITNESS CLUBS, INC.
By: /s/ Anthony Choe
---------------------------------
Title: Secretary for the buyer
<PAGE> 7
ANNEX A
TO TRANSITION SERVICES AGREEMENT
For purposes of this Annex A, the first "month" of this Annex A shall begin on
the Closing Date and end on the day immediately preceding the next month's
anniversary of the Closing Date, and each succeeding "month" shall be determined
in like manner. (For example, if the Closing Date were September 28, 1999, the
first "month" would run from September 28, 1999 through October 27, 1999, and
the next month would run from October 28, 1999 through November 27, 1999).
With respect to all Services, the services and fees set forth below include
transfer of records and data relating to such service and transitioning of such
service to Buyer as and when reasonably requested by Buyer. The only additional
charges for transitioning will be mutually agreed on if Parent is required to
perform services outside those that would have been expected in transitioning
the Services to Buyer if all the transitioning had occurred at the closing of
the transaction or if Buyer materially changes the operation of the Business
(including without limitation by the opening of additional clubs).
All Services are to be provided to the same extent and in the same manner as
provided to the Spectrum Clubs prior to the date of this Agreement, except that
Services will also be provided in such manner to the Anaheim and Puente Hills
Spectrum Clubs as and to the extent such clubs become operational. Set forth
below are examples and illustrations of Services, but they are not intended to
be exhaustive, and any services falling within the categories below are intended
to be covered by this Agreement.
1. HUMAN RESOURCES. $10,360 per month ($14,504 per month during Continuation
Period)
- - Prepare affirmative action plans, manage Department of Labor compliance
audits, provide on-site compliance support, investigate allegations of
harassment and/or discrimination, establish policies on allegations,
assist in grievance resolution, providing benefit administration.
- - Administer benefit plans for employees of Buyer, including 401(k) plan,
dental, life and medical insurance, vacation and other similar plans;
prepare and file (or deliver to Buyer in a timely fashion for filing)
required government reports (including plan 5500's); maintain benefit
plan accounting and administrative information.
- - Administer workers compensation claims of Buyer, including interface
with insurance providers.
- - Provide services relating to labor relations, labor dispute resolution,
employee contract negotiations, EEO compliance, and workplace issues
management.
- - Conduct periodic human resource-related training for Buyer's employees,
including health and safety seminars at the clubs operated by Buyer.
- - Maintain human resources systems.
- - Deliver Buyer's employee files to Buyer at any time upon Buyer's
request, provided that Parent may retain copies of such files for its
records.
- - Administer paperwork and processes related to hiring and termination of
Buyer's employees, including processes required to update payroll
accounts.
- - Maintain master file/database of employees.
- - Provide all training programs, manuals and other materials and services
used to train employees in the same manner as prior to the date of this
Agreement.
- - Use the same degree of care as used in Parent's business to notify Buyer
of any changes in applicable laws and regulations relating to employees,
including without limitation wages and hours, job posting, "right to
know" and safety.
2. CHILD CARE $1,498 per month ($2,097 per month during Continuation
Period)
- - Administer and supervise child care programs and services at Spectrum
Clubs in the same manner as prior to this Agreement.
<PAGE> 8
- - Inform Buyer as to applicable legal requirements related to child care
and prepare and file with governmental authorities any necessary
paperwork so that relevant employees maintain licenses, bonds and
otherwise comply with such requirements.
3. FITNESS $1,428 per month ($1,999 per month during Continuation Period)
- - Assist with fitness equipment purchasing programs in place.
- - Provide supervision and administration of all fitness and group exercise
functions.
- - Assist in maintaining all staffing levels and standard in place prior to
date of this Agreement.
4. PAYROLL $3,300 per month ($4,620 per month during Continuation Period)
- - Provide payroll processing services for hourly and salaried employees of
Buyer (e.g. input data, process payroll, distribute paychecks, provide
compensation system development and support, maintain compensation
database, process payroll taxes and reports, issue W-2 forms, submit
required information and contributions to third-party benefit plan
record-keeper or plan administrators, reconcile with general ledger, and
maintain applicable supporting records and documentation).
- - Administer and update Ceridian software at the club level.
- - Provide semi-monthly summary of Ceridian payroll run to Buyer for
approval prior to release of payroll checks. (Buyer shall be responsible
for turnaround in time for payroll to be timely paid.)
- - Provide software updates and interfaces as necessary between Ceridian
payroll systems and Solomon general ledger software (or other systems
and software used by Parent).
- - Maintain interface with Kronos time-clock system as necessary.
- - Notify Buyer regarding any change in laws or regulations governing wages
and hours, overtime and similar items with respect to employee
compensation.
- - Reconcile payroll checkbook within 30 days after receipt of bank
statement.
5. ACCOUNTS PAYABLE $2,782 per month ($3,894 per month during Continuation
Period)
- - Process vendor payments.
- - Maintain and upgrade all software and interfaces with Solomon general
ledger system.
- - Maintain all functions necessary to interface with purchasing services.
- - Maintain payment records in accordance with GAAP.
- - Produce 1099 forms.
- - Maintain A/P Vendor information with either SSN or Employer ID for all
contractors.
- - Deliver to Buyer the vendor files at any time upon Buyer's request.
- - Maintain check stock, signature stamps, MICR cartridges or any other
signing device in a safe and secure environment.
- - Deliver to Buyer check stock at any time upon Buyer's request.
- - Maintain existing checks and balances with regards to Purchase Orders,
Invoices, Payments, as well as routine audits of these controls.
- - Prepare and mail checks on Buyer's behalf of open invoices to maintain
good credit and to take advantage of available vendor discounts (checks
to be drawn on Buyer's account).
- - Reconcile accounts payable checkbook within 30 days after receipt of
bank statement.
6. PURCHASING $4,472 per month ($6,260 per month during Continuation
Period)
- - Provide detailed accounting of purchases, costs and allocation of
supplies.
- - Maintain all existing methods of allocating purchases in place prior to
the date of this Agreement.
- - Provide purchasing functions on a "most favored nations" basis vis-a-vis
Parent's Sports Club operations, including negotiation of vendor
contracts.
- - Maintain forms inventory.
<PAGE> 9
- - Oversee mail, messenger and courier services.
- - Coordinate and arrange for purchases of office and club supplies and
needs of building operations department.
- - Process orders and payments, maintain accurate records and obtain
approval of Buyer for any capital purchases.
7. MIS $6,338 per month ($8,873 per month during Continuation Period)
- - Maintain EDP hardware and software.
- - Provide membership database queries to Buyer.
- - Provide modifications and programming assistance with all software and
hardware.
- - Process monthly EFT's.
- - Provide backup program and data files so that Facilities can properly
backup program and data files at the Facilities.
- - Licensing fees for separate Ceridian systems is deemed an extra direct
cost to be borne by Buyer.
8. ACCOUNTING $11,022 per month ($15,430 per month during Continuation
Period)
- - Assist Spectrum Club controllers in preparing monthly, quarterly and
year-end income statements on a club-by-club basis.
- - Assist Spectrum Club controllers with general ledger maintenance and
control (separate from Seller's ongoing business and other assets)
including monthly general ledger closings and reconciliation of bank
account and general ledger account balances; prepare reconciliation for
all subsidiary systems, including but not limited to accounts
receivable, accounts payable, inventory, fixed assets and unsettled
liability.
- - Assist Spectrum Club controllers in preparing flash (daily) and weekly
operating results.
- - Provide monthly fixed asset, marketing, promotions and inventory
reporting.
- - Provide accounts payable processing in the normal course of business,
including marketing programs and purchases.
- - Maintain capital asset records, updating for additions, retirements,
depreciation and other transactions. Make capital asset general ledger
entries.
- - Maintain and support all existing systems and provide systems
programming time; provide system trouble shooting services (including
after business hours) consistent with current practice.
- - Provide financial and management reports in formats used as of the date
of this Agreement, including but not limited to all membership, pricing,
and dues grid information.
- - Assist in preparation of tax returns and state annual reports; provide
other tax consultation to the extent currently performed in-house.
- - Provide Buyer with real time access to all systems from Buyer's
corporate headquarters, including access to all archived data or
information on paper, as long as it doesn't disrupt normal operation.
- - Cooperate with respect to any audits of Buyer's financial records and
other information reasonably requested by auditors, lenders or other
persons or entities designated by Buyer, at Buyer's reasonable request.
- - Assist with conversion of and provide export files of pertinent
accounting files, including budgets, history, payroll, human resources
and accounts receivable.
- - Maintain EDP hardware and software.
- - Prepare financial statements in accordance with GAAP using methods as
directed by Buyer.
- - Oversee EFT processing.
- - Provide technical support and process assistance for Buyer's budget
preparation.
9. DEVELOPMENT $0 per month ($0 per month during the Continuation Period)
- - Perform responsibilities customary for general contractor and real
estate developers with respect to existing projects at Anaheim, Thousand
Oaks, Canoga Park and Puente Hills.
- - Oversee construction projects undertaken at Manhattan Beach.
10. MARKETING $5,438 per month ($7,613 per month during Continuation
Period)
<PAGE> 10
- - Provide marketing, advertising, graphics, printing and production
services.
- - Meet deadlines for placement of advertising and production of all
collateral materials.
11. BUILDING OPERATIONS $15,474 per month ($21,663 per month during
Continuation Period)
- - Oversee facilities and building operations managers.
- - Repair equipment and club facilities.
- - Manage third-party service providers.
- - Maintain detailed, item-by-item inventory of equipment (provided that
Buyer notifies personnel responsible for this if Buyer uses its own
personnel and equipment to move inventory).
12. RETAIL $722 per month ($1,010 per month during Continuation Period)
- - Provide oversight of the retail operations (kiosks) at Spectrum Clubs.
- - Supply logo wear on same terms as prior to the date of this Agreement
(direct cost of such logo wear is billable to Buyer).
13. MISCELLANEOUS (no charge unless specifically noted below)
- - Provide laundry services to the extent and expense currently provided to
any Spectrum Club (e.g. Howard Hughes) at the same charge as existing in
historical financial statements.
- - Provide assistance in obtaining licenses and permits necessary to
operate the Spectrum Clubs in substantially the same manner as operated
prior to the date of this Agreement at an hourly rate of $60 per hour.
Provide assistance in reviewing such licenses and permits that expire
during the term of this Agreement for no charge.
- - Implement fitness equipment purchases already included in capital
budget.
- - Supply Buyer's requirements for PTS (Private Trainer Systems) branded
nutritional products or any successor or replacement products offered by
Parent or any of its subsidiaries in the operation of the Sports Clubs,
at a pass-through (e.g. no markup) of Parent's cost for the same
product.
- - Provide Special projects (e.g. management of "Member Appreciation Days")
at the request of Buyer at a fee equal to the Seller's hourly wage rate
for the individual providing the service.
- - Assist in preparing sales tax returns.
- - Transfer calls and otherwise refer inquiries and contacts from vendors,
customers, members, etc. to Buyer.
<PAGE> 1
EXHIBIT 21.1
Subsidiaries
<PAGE> 2
<TABLE>
<CAPTION>
SUBSIDIARY FORM OWNER OWNERSHIP
- ---------- ---- ----- ---------
<S> <C> <C> <C>
TVE, Inc. (Inactive) Corporation The Sports Club Company, Inc. 100.00%
SCC Development Company Corporation The Sports Club Company, Inc. 100.00%
The Sports Connection Holding Company Corporation The Sports Club Company, Inc. 100.00%
SCC California, Inc. Corporation The Sports Club Company, Inc. 100.00%
Sports Club, Inc. of California Corporation The Sports Club Company, Inc. 100.00%
Pontius Realty, Inc. Corporation The Sports Club Company, Inc. 100.00%
Irvine Sports Club, Inc. Corporation The Sports Club Company, Inc. 100.00%
The SportsMed Company, Inc. Corporation The Sports Club Company, Inc. 100.00%
SCC Sports Club, Inc. (Inactive) Corporation The Sports Club Company, Inc. 100.00%
L.A./Irvine Sports Clubs, Ltd. Partnership Sports Club, Inc. of California 50.10%
Talla New York, Inc. Corporation Sports Club, Inc. of California 100.00%
Reebok-Sports Club/NY Partnership Talla New York, Inc. 60.00%
El Segundo-TDC, Ltd. Partnership SCC California, Inc. 17.19%
Pontius Realty, Inc. 0.75%
Sports Club, Inc. of California 9.89%
The Sports Club Company, Inc. 9.89%
Sports Connection ES/MB Partnership SCC California, Inc. 43.73%
El Segundo-TDC, Ltd. 6.27%
SCC Nevada, Inc. Corporation The Sports Club Company, Inc. 100.00%
SF Sports Club, Inc. Corporation The Sports Club Company, Inc. 100.00%
Washington D.C. Sports Club, Inc. Corporation The Sports Club Company, Inc. 100.00%
HFA Services, Inc. Corporation Health Fitness Organization 100.00%
of America, Inc.
Sepulveda Realty and Development Co. Inc. Corporation The Sports Club Company, Inc. 100.00%
SCC Realty Company Corporation The Sports Club Company, Inc. 100.00%
SCC Liquidating Company Corporation The Sports Club Company, Inc. 100.00%
NY Sports Club, Inc. Corporation The Sports Club Company, Inc. 100.00%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of KPMG LLP
<PAGE> 2
Independent Auditors' Consent
The Board of Directors
The Sports Club Company, Inc.
We consent to incorporation by reference in the Registration Statement (No.
333-26421) on Form S-8 and the Registration Statement (No. 333-38459) on Form
S-3 of The Sports Club Company, Inc. of our report dated February 25, 2000,
relating to the balance sheets of The Sports Club Company, Inc. as of December
31, 1998 and 1999, and the related statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, which report appears in the December 31, 1999 annual report
on Form 10-K of The Sports Club Company, Inc.
KPMG LLP
Los Angeles, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 53,060
<SECURITIES> 24,436
<RECEIVABLES> 2,491
<ALLOWANCES> 342
<INVENTORY> 1,355
<CURRENT-ASSETS> 83,341
<PP&E> 131,832
<DEPRECIATION> 12,873
<TOTAL-ASSETS> 223,553
<CURRENT-LIABILITIES> 23,833
<BONDS> 0
0
0
<COMMON> 209
<OTHER-SE> 97,478
<TOTAL-LIABILITY-AND-EQUITY> 223,553
<SALES> 87,325
<TOTAL-REVENUES> 87,325
<CGS> 60,528
<TOTAL-COSTS> 60,528
<OTHER-EXPENSES> 18,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,991
<INCOME-PRETAX> 3,669
<INCOME-TAX> 1,460
<INCOME-CONTINUING> 2,209
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 899
<NET-INCOME> 1,310
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
