-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cc1LM9kTsLqNssUageXyvBES8HPKVN004cpUXbN4n3wAr31y1YnGRFpk3/t8EoBu x61PDZvEuGgL45XcYn74OA== 0000950148-99-000560.txt : 19990329 0000950148-99-000560.hdr.sgml : 19990329 ACCESSION NUMBER: 0000950148-99-000560 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 30 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPORTS CLUB CO INC CENTRAL INDEX KEY: 0000924373 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEMBERSHIP SPORTS & RECREATION CLUBS [7997] IRS NUMBER: 954479735 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13290 FILM NUMBER: 99574363 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: STE 300 CITY: LOS ANGELEL STATE: CA ZIP: 90025-3384 BUSINESS PHONE: 3104795200 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1998. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act for the transition period from _______to_______. COMMISSION FILE NUMBER: 1-13290 THE SPORTS CLUB COMPANY, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 95-4479735 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11100 Santa Monica Blvd., Suite 300 Los Angeles, California 90025 (Address of registrant's principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 479-5200 Securities registered pursuant to Name of each exchange on Section 12(b) of the Act: which registered Title of each class Common Stock $.01 par value American Stock Exchange Securities registered pursuant to None Section 12(g) of the Act: 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 15, 1999 was $31,548,895. 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 18,819,932 on March 15, 1999. 2 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 thirteen Clubs, under the "Sports Club" and "Spectrum Club" names, including The Sports Club/LA and Reebok Sports Club/NY. Our Clubs offer a wide range of fitness and recreation options and other amenities, and are marketed to affluent, health conscious individuals who desire a service oriented state-of-the-art club. Our Clubs are conveniently located in spacious, modern facilities that typically include fitness centers, swimming pools and basketball courts. Our premier Clubs, Sports Clubs, are designed as "urban country clubs," offering a full range of services including private trainers, registered nutritionists, exercise classes, and various other amenities including physical therapy, spas, salons, activewear boutiques, restaurants, cafes, sports bars, childcare, laundry/dry cleaning services, valet parking and executive locker rooms. Sports Club facilities range in size from 90,000 to 140,000 square feet. We have four Sports Clubs located in Los Angeles and Irvine, California, New York, New York and Las Vegas, Nevada. The Spectrum Clubs are typically housed in 25,000 to 65,000 square foot facilities and offer many of the amenities listed above. We have nine Spectrum Clubs that are all located in Southern California. Initiation fees and monthly membership dues at Sports Clubs are higher than those at Spectrum Clubs, and initiation fees and monthly membership dues at all 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 and sports boutiques, also contribute a significant portion of our revenues. Our subsidiary, The SportsMed Company ("SportsMed"), operates physical therapy facilities in some Clubs. Our strategy is to expand the Sports Club franchise 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 six Sports Clubs under development in New York City (in Rockefeller Center and in the upper east side), Washington, D.C., San Francisco, Boston and Houston. We expect to open these Clubs from late 1999 through 2001. We are currently developing three Spectrum Clubs in Southern California. We will continue to investigate other sites for new Club developments. According to the International Health, Racquet & Sportsclub Association ("IHRSA"), the industry's leading trade organization, 20.8 million Americans were members of more than 13,000 sports and fitness clubs in 1998. Revenues generated by the United States sports and fitness club industry increased at a compound annual rate of 8.6% from $5.5 billion in 1991 to $9.0 billion in 1997. The industry has benefited from the general public's increasing awareness of the importance of physical exercise. We target members age 35 and older who, according to IHRSA, represent 47% 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 and cardio-vascular equipment, o basketball, volleyball, racquetball, squash and paddle tennis courts and, in the case of The Sports Club/Las Vegas, indoor tennis courts, 2 3 o aerobics/exercise rooms featuring classes throughout the day and evening, seven days a week, including aerobics, dance, Step Reebok, yoga and karate, o stationary bicycles used in an aerobic class environment, and, in the case of Reebok Sports Club/NY, climbing walls, o swimming pools, golf practice nets and running tracks, o men's and women's locker rooms featuring wood lockers, o complete spa areas with steam rooms, saunas, jacuzzis and professional massage, 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 PTS Private Training System nutritional programs and products, 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 and swimming, o full-time activities directors responsible for social and media events for members, including organizing trips, lectures and charity events, o full-time sports coordinators who organize sports tournaments, leagues and classes, and o wellness protocols such as exercise regimens designed for specific groups of members. We currently have four 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, 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. THE SPECTRUM CLUBS We currently operate Spectrum Clubs at nine locations in Southern California. While more limited in size and offering fewer social and recreational options than Sports Clubs, Spectrum Clubs are generally housed in relatively large facilities containing modern equipment and offer members personalized training and instruction. o Spectrum Clubs typically range in size from 25,000 to 65,000 square feet, include full coed weight training rooms, computerized cardiovascular centers, aerobics and exercise classrooms, locker rooms, private training, child care, juice bars and towel service. 3 4 o Certain of the Spectrum Clubs also offer swimming pools, childcare, pro shops, basketball courts, racquetball courts, spa facilities, physical therapy facilities, volleyball, martial arts, dance and children's and seniors' programs. o We own 100% of eight of the currently operating Spectrum Clubs. We are the sole general partner and manager and receive, as our equity interest, 46.1% of the net income generated by the operation of the Spectrum Club - Manhattan Beach. THE SPORTSMED COMPANY, INC. Our SportsMed subsidiary operates physical therapy facilities within The Sports Club/LA, 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 nutritionists who provide services to members and others. A physician-owned company provides medical services and pays a management fee to SportsMed. 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. Rockefeller Center, New York. This 89,000 square foot Club is located at the Rockefeller Center Commercial Complex in midtown Manhattan and is expected to be opened in late 1999. 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 early 2000. This site is the location of the former Vertical Club, which was closed in February for major renovation and conversion to a Sports Club. The demographics in the vicinity of our New York developments compare favorably to the demographics of our existing Club in the upper west side of Manhattan, Reebok Sports Club/NY. Millennium Developments. We are developing Sports Clubs 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 significantly 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 a five star hotel. These Clubs will be in the 80,000 to 100,000 square foot size range and will offer services typically found at our other Sports Club sites. We expect to open these Clubs in late 2000 and 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/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. Current Spectrum Club Developments. We have entered into leases with respect to three Spectrum Clubs in Southern California. Each Club would be approximately 55,000 square feet. We currently expect that these Clubs will open in late 1999 and early 2000. In January 1999, we acquired the membership rights of a sports and fitness club located near Thousand Oaks, California, for $650,000. We have moved most members of this club, which closed in January 1999, to the Spectrum Club - Thousand Oaks. 4 5 Other Developments. We currently believe that our resources can be best used to develop new Sports Clubs, but we may consider the acquisition and conversion of an existing sports and fitness club to a Sports Club or Spectrum Club or the development of additional Spectrum Clubs if a suitable opportunity arises. We believe that, because of our established reputation and the prestige associated with the Sports Clubs and the Spectrum 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. 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. While we anticipate that these types of losses will be incurred in the future as a normal part of our operations, we believe that our income from newer 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 acquire may vary, and, as a result, acquired Clubs may have lower operating income than a typical 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 Clubs. Newly acquired Clubs undergoing such improvements may perform at lower margins during the period of implementation of new policies and programs. Disposition of Spectrum Clubs. From time to time, we have disposed of Spectrum Clubs. The Spectrum Club - Santa Monica was closed in November 1998, upon expiration of the lease for the property, and many of its members were moved to the Spectrum Club - Water Garden. We subleased the Spectrum Club - Fountain Valley to another health and fitness club operator in January 1999. In February 1999 we entered into an agreement to sell the Spectrum Club - Santa Ana. 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 these Clubs as leaders in the sports and fitness industry justifies charging a premium. Our members include professionals, sports and entertainment personalities and business people. The Spectrum Clubs emphasize personalized service and instruction and the creation of an "urban country club" atmosphere in which members can relax and socialize. The cost of Spectrum Club membership (in terms of both initiation fees and monthly membership dues) is less than membership at Sports Clubs and, within the Southern California market, we believe the Spectrum Clubs offer as many services and are as luxurious and aesthetically-pleasing as any other sports and fitness club with which they compete. Our marketing efforts at older, more seasoned 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 Clubs is on attracting additional members. Referrals, Endorsements and Advertising. Word-of-mouth referrals and endorsements by existing members are the Clubs' most important source of new members. In addition, all Clubs utilize targeted marketing programs which include advertisements, promotions, public relations and community events. The principal marketing media for the Clubs are direct mail with some use of print advertisements. The print advertisements are supplemented by special events and special membership programs. The Clubs host corporate parties and charity benefits and often donate free or discounted memberships to charitable organizations. 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. 5 6 Targeted Members. The largest segment of the membership base for the 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 Clubs to business centers and the use of the Clubs to conduct business and to develop and maintain business contacts. We target the corporate membership market primarily through the Sports Clubs. Sports Clubs employ several Corporate Membership Directors whose principal responsibilities are to solicit corporate memberships from businesses operating in the vicinity of Sports Clubs. Sports Clubs offer corporate group-discounted initiation fees depending upon the number of new members involved. 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. Shape-Over Programs. We believe that the image of the Clubs as multiple-amenity facilities which offer members numerous social and less-rigorous exercise options will help us attract prospective members who do not currently exercise regularly. Our shape-over program is intended to attract those people who are "out of shape" but who are interested in pursuing a regular exercise regimen. Prospective members are given a free, introductory fitness consultation with Club instructors, which covers nutritional and dietary suggestions, personalized fitness programs and home exercise plans. In addition, the Clubs have group aerobics classes that are specially designed for this target group. 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 "KidFit" and "TeenFit" programs which target children between the ages of 5 and 17 and involve both one-on-one private training and a six-week fitness training program. The Clubs' weight-training facilities are made available to children 13 and older at off-peak hours, and specially-designed movement classes utilizing a variety of fitness equipment are offered to younger children. The Clubs offer a summer sports camp, provide individualized sports 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 6 7 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 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 Club memberships require a one-time initiation fee plus monthly membership dues. Unlike many other clubs, we do not offer financing for memberships. Members electing to pay their Club dues on a monthly basis must pay by EFT, by which each member is automatically debited each month for dues either through a checking account or credit card. Prepaid memberships for an entire year entitle the member to a discount equal to one month of membership dues. Approximately 70% of monthly membership dues are paid via EFT and the remaining 30% of monthly membership dues are prepaid for twelve months. At established Clubs, the average life of a Sports Club membership is four to five years while the average life of a Spectrum Club membership is approximately three years. Sports Club Memberships. 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 $88 to $180. Corporate 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 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 all facilities excluding those privileges associated with a racquet membership; courts are available to holders of health memberships for an additional fee. 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. Spectrum Club Memberships. Spectrum Clubs generally offer racquet and health memberships. The Spectrum Club - Fullerton currently offers executive memberships. At some Spectrum Clubs, lockers may be rented by members on a monthly basis for an additional charge. As members of the IHRSA, Spectrum Clubs extend guest membership privileges to out-of-town visitors who are members of IHRSA clubs in their hometown, and Spectrum Club members may use IHRSA clubs in cities to which they travel. Spectrum Club initiation fees are generally $325. Monthly membership dues are generally $57 for health 7 8 membership, $67 for racquet membership and $62 for an all club membership allowing members unlimited use of all Spectrum Clubs. 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 targeted by Spectrum Clubs and Sports Clubs. 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 and Japan and we are awaiting final trademark approval in Australia. We hold a federal trademark for the "Spectrum Club" name. 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 believe that our activities are in substantial compliance with all applicable statutes, rules and decisions. Under so-called state "cooling-off" statutes, a member has the right to cancel his or her membership for a period of three to 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 for medical reasons or upon relocation of a certain distance from the nearest Club. The specific procedures for cancellation in these circumstances vary due to differing state laws. In each instance, the canceling member is entitled to a refund of prepaid amounts only. Furthermore, where permitted by law, a cancellation fee is due to us upon cancellation and we may offset such amount against any refunds owed. 8 9 EMPLOYEES At January 31, 1999, we had approximately 2,250 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 January 31, we employed approximately 800 full-time employees, approximately 250 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 (subject to a minority interest held by D. Michael Talla), The Sports Club/Las Vegas and the Spectrum Clubs in Agoura Hills, Thousand Oaks, Canoga Park and Fountain Valley including all underlying real estate. The building and real property at the Spectrum Club - - Santa Ana and the building at the Spectrum Club - Fullerton are leased with a purchase option from Millennium. See "Certain Relationships and Related Transactions." We also 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:
YEAR OPENED ("O") OR APPROXIMATE ACQUIRED OWN OR LEASE CLUB SQUARE FEET ("A") EXPIRATION DATE RENEWAL OPTION - ---- ----------- ----------- --------------- -------------- The Sports Club/LA(1)................... 100,000 1994 A Own N/A The Sports Club/Irvine.................. 130,000 1994 A Own N/A Reebok Sports Club/NY(2)................ 140,000 1995 O 4/17/15 Three 14-year options The Sports Club/Las Vegas............... 136,000 1997 A Own N/A Spectrum Club - Manhattan Beach(3)...... 65,000 1987 O 2/28/02 Three 5-year options Spectrum Club - Water Garden............ 25,000 1993 O 6/30/08 5-year option Spectrum Club - Agoura Hills............ 30,000 1994 A Own N/A Spectrum Club - Howard Hughes Center.... 36,000 1994 A 9/14/08 Two 5-year options Spectrum Club - Valencia................ 57,000 1997 O 7/1/12 Two 5-year options Spectrum Club - Fullerton(4)............ 121,000 1997 A Building 12/31/17 Two 10-year options Land 4/11/35 N/A Spectrum Club - Santa Ana(5)............ 75,000 1997 A 12/31/17 Two 10-year options Spectrum Club - Canoga Park............. 85,000 1997 A Own N/A Spectrum Club - Thousand Oaks(6)........ 54,000 1999 O Own N/A Spectrum Club - Fountain Valley(7)...... 42,000 1997 A Own N/A
- ---------- (1) D. Michael Talla, our Chairman and CEO, has the right to 49.9% of the first $300,000 of annual operating income from the partnership which owns The Sports Club/LA. See "Certain 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) We own a 46.1% interest in the Spectrum Club - Manhattan Beach. (4) We lease the building and land from different parties. (5) We have entered into an agreement to sell this Club. This sale is expected to close in the second quarter of 1999. We intend to use the sale proceeds to acquire ownership of Millennium's interest in this Club. 9 10 (6) We expect to enter into a sale-leaseback agreement with respect to this Club, which is expected to close in the second quarter of 1999. (7) We have leased this Club to another sports and fitness club operator. The building, improvements and personal property of The Sports Club/Irvine secure a $4.4 million note bearing interest at a fixed annual rate of 6.0%. The note requires quarterly principal payments of $125,000 with a balloon payment of $4.0 million due on November 1, 1999. All assets of the Spectrum Club - Agoura Hills secure a $2.5 million note which bears interest at a fixed annual rate of 8.5%. Monthly principal and interest payments of $20,107 are required through the note's maturity in April 2024. All of the Clubs maintain comprehensive casualty, liability and business interruption insurance and Clubs located in California maintain a blanket $30.0 million earthquake insurance policy. We believe that our insurance coverage is in accordance with 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. 10 11 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. 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 seeks the return of amounts paid (approximately $3.0 million) plus punitive damages and attorneys fees. A demurrer was sustained without leave to amend as to the claims for fraud and misrepresentation. Agricultural has appealed the decision and the parties are awaiting a decision before further proceedings are held in the trial court. An appraisal hearing found that the loss suffered was less than the policy proceeds but greater than the amount paid by Agricultural to date. Agricultural contends that portions of the appraised loss are not covered by the policy, an issue to be determined by the trial court. We will seek to be indemnified by MKDG for all damages and costs incurred in this action, although no assurance can be made that MKDG will indemnify 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 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 in excess of $1.0 million and unspecified general damages. We believe the claim is without merit and have filed a cross-complaint seeking rescission of the lease on the basis of fraud, mistake and negligent misrepresentation. Other Matters. We are also involved in various claims and lawsuits incidental to our business, including claims arising from accidents and disputes with landlords. 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 11 12 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.
CALENDAR QUARTER PRICE RANGE OF COMMON STOCK ---------------- ------------------------------ HIGH LOW -------- ------- Year Ended December 31, 1997: First Quarter.............................................. $5.125 $2.625 Second Quarter............................................. 5.375 4.125 Third Quarter.............................................. 8.875 5.250 Fourth Quarter ............................................ 9.500 7.750 Year 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 (through March 15, 1999)..................... 5.063 3.750
As of March 15, 1999 we had approximately 55 stockholders of record. The closing price of our Common Stock as reported by the AMEX on March 15, 1999, was $4.375. 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. 12 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table presents our summary financial and operating data for the fiscal years ended December 31, 1994 through 1998 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.
FISCAL YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1994(1) 1995 1996 1997 1998 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) STATEMENT OF INCOME DATA: Revenues ...................................................... $ 18,846 $ 34,659 $ 36,918 $ 61,154 $ 81,923 Operating expenses: Direct ...................................................... 10,525 21,730 22,989 43,517 56,746 Selling, general and administrative ......................... 3,166 5,486 6,052 6,607 8,556 Depreciation and amortization ............................... 1,510 2,775 2,490 3,919 5,282 -------- -------- -------- ------- -------- Total operating expenses ............................... 15,201 29,991 31,531 54,043 70,584 -------- -------- -------- ------- -------- Income from operations ................................. 3,645 4,668 5,387 7,111 11,339 Other income (expense): Interest .................................................... (1,213) (2,600) (2,682) (3,206) (1,629) Minority interests (29) (150) (150) (22) (150) Equity interest in net income of unconsolidated subsidiaries .............................................. 641 860 631 696 880 Non recurring items ......................................... --- -- (300) (2,025) (314) -------- -------- -------- ------- -------- Total other income (expense) (601) (1,890) (2,501) (4,557) (1,213) -------- -------- -------- ------- -------- Income before income taxes and extraordinary charge 3,044 2,778 2,886 2,554 10,126 Provision for income taxes .................................... 1,244 1,139 1,183 1,014 3,971 -------- -------- -------- ------- -------- Net income before extraordinary charge ................. 1,800 1,639 1,703 1,540 6,155 Extraordinary charge from early extinguishment of debt, net of income tax effect of $1,331 ................................. -- -- -- -- 2,173 -------- -------- -------- ------- -------- Net income ............................................. $ 1,800 $ 1,639 $ 1,703 $ 1,540 $ 3,982 ======== ======== ======== ======== ======== Net income per share: Basic ....................................................... $ 0.23 $ 0.14 $ 0.15 $ 0.12 $ 0.21 ======== ======== ======== ======== ======== Diluted ..................................................... $ 0.23 $ 0.14 $ 0.15 $ 0.12 $ 0.21 ======== ======== ======== ======== ======== Net income per share before non-recurring items and extraordinary charge: ....................................... Basic ....................................................... $ 0.23 $ 0.14 $ 0.17 $ 0.22 $ 0.35 ======== ======== ======== ======== ======== Diluted ..................................................... $ 0.23 $ 0.14 $ 0.17 $ 0.22 $ 0.34 ======== ======== ======== ======== ======== Weighted average number of common shares outstanding: Basic ....................................................... 7,836 11,353 11,355 12,524 18,603 ======== ======== ======== ======== ======== Diluted(2) .................................................. 7,836 11,357 11,360 12,683 18,829 ======== ======== ======== ======== ========
AT DECEMBER 31, -------------------------------------------------------- 1994(1) 1995 1996 1997 1998 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents ..................... $ 5,042 $ 1,545 $ 4,146 $ 1,581 $ 2,233 Current assets ................................ 7,398 7,147 7,341 4,926 7,043 Property and equipment, net ................... 59,811 59,956 72,736 106,791 135,269 Total assets .................................. 81,676 83,161 95,697 131,561 163,757 Deferred membership revenue ................... 5,878 5,614 7,481 9,936 9,953 Current liabilities ........................... 11,194 11,355 14,159 26,844 26,199 Long-term debt including current installments.. 33,489 32,913 38,497 50,798 37,441 Stockholders' equity .......................... 37,823 39,492 41,202 58,477 104,539
- ---------- (1) Prior to October 20, 1994, we operated through various partnerships and corporations. Historical data for periods through October 20, 1994 have been adjusted to reflect compensation and tax provisions as if we had operated as a corporation during such period. (2) Does not include up to 159,081 shares to be issued in 1999 as consideration for the acquisition of Spectrum Clubs acquired from Racquetball World. 13 14 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 operations of Reebok Sports Club/NY were accounted for under the equity method of accounting until December 30, 1996, at which time we acquired a majority interest in the Club. Following such date, we have consolidated the operations of Reebok Sports Club/NY with our other consolidated operations. The Spectrum Club - Manhattan Beach is accounted for under the equity method of accounting. 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 in a transaction accounted for as a purchase; one of these Clubs was leased to another health and fitness operator in January 1999; the other three Clubs are now operated as Spectrum Clubs. In November 1998 we closed the Spectrum Club - Santa Monica. Seasonal factors have not had a significant effect on our operating results. RESULTS OF OPERATIONS 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 continued to mature. Lower operating margins at the recently 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. We believe these costs should continue to 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 $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 operations. 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 14 15 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. Fiscal 1997. Our revenues for the year ended December 31, 1997, were $61.2 million, compared to $36.9 million for 1996, an increase of $24.3 million or 65.9%. The increase resulted from the following revenue sources: Reebok Sports Club/NY, which was consolidated following the acquisition of a majority interest in the Club on December 30, 1996, contributed revenues of $18.1 million; the Spectrum Club - Valencia contributed revenues of $1.6 million; SportsMed contributed revenues of $1.5 million; and growth at the remaining Clubs contributed revenues of $900,000. Our direct operating expenses increased to $43.5 million for the year ended December 31, 1997, compared to $23.0 million for 1996. The increase resulted primarily from the inclusion of operating expenses at Reebok Sports Club/NY, the opening of the Spectrum Club - Valencia and the acquisition of The Sports Club/Las Vegas. Direct operating expenses as a percentage of revenues increased to 71.2% for 1997 compared to 62.3% for 1996 due to lower margins at Reebok Sports Club/NY and the Spectrum Club - Valencia. Newly developed Clubs historically operate at lower margins due to various fixed expenses such as rent, utilities and certain payroll costs until the membership reaches a mature level. Similarly, newly acquired Clubs may also perform at lower margins prior to and during implementation of new policies and programs. Selling, general and administrative expenses were $6.6 million for the year ended December 31, 1997, compared to $6.1 million for 1996. Selling costs increased approximately $211,000 due to the consolidation of direct selling expenses incurred at Reebok Sports Club/NY, the opening of the Spectrum Club - Valencia and the acquisition of The Sports Club/Las Vegas. General and administrative costs increased by approximately $300,000 due to increases in corporate overhead and the addition of personnel to accommodate new Clubs. Selling, general and administrative costs decreased as a percentage of revenue from 16.4% for 1996 to 10.8% for 1997. This percentage decrease resulted from the consolidation of Reebok Sports Club/NY revenues. The consolidation of revenues from Reebok Sports Club/NY did not increase general and administrative costs because we managed the Club and accrued these costs prior to the consolidation. Depreciation and amortization expenses were $3.9 million for the year ended December 31, 1997, compared to $2.5 million for 1996. The increase was due primarily to the consolidation of Reebok Sports Club/NY, the opening of the Spectrum Club - Valencia and the acquisition of The Sports Club/Las Vegas. Interest expense was $3.2 million in the year ended December 31, 1997, compared to $2.7 million for 1996. Interest expense of $340,000 at Reebok Sports Club/NY and interest on new equipment financings was partially offset by increased interest income due to more available cash for investment and lower principal balances as other indebtedness matured. Equity interest in net income of unconsolidated subsidiary was $696,000 for 1997 compared to $631,000 for 1996. These amounts are associated with the Spectrum Club - Manhattan Beach's operations and the increase reflects our share of the improved profitability at that Club. Equity in the operations of Reebok Sports Club/NY was not significant for 1996. Our net income before income taxes and non-recurring items was $4.6 million for the year ended December 31, 1997 compared to $3.2 million for 1996. Non-recurring items for 1997 consisted of litigation 15 16 settlement costs of $2.0 million relating to the closing of the Spectrum Club - Century City in July 1995. Non-recurring items for 1996 were $300,000. Our income tax rate was 38% for the year ended December 31, 1997, and 41% for 1996, resulting in net income of $1.5 million for the year ended December 31, 1997, compared to net income of $1.7 million in 1996. After tax net income before non-recurring items was $2.8 million for 1997, compared to $1.9 million for 1996. The lower tax rate for 1997 resulted from the reduction of valuation allowances on certain deferred income tax assets. Basic and diluted earnings per share were $.12 and $.15 for the years ended December 31, 1997 and 1996, respectively. Basic and diluted earnings per share excluding non-recurring items were $.22 and $.17 for the years ended December 31, 1997 and 1996, respectively. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1998, we generated $10.0 million of cash from operating activities, compared to $4.5 million in fiscal 1997. At December 31, 1998, we had a cash balance of $2.2 million available for general corporate purposes. During 1998, we generated $26.1 million of cash from financing activities. In April 1998, we completed the sale of 6,500,000 shares of our common stock and realized net proceeds of $48.7 million. A portion of these funds was used to repay indebtedness. During 1998 we reduced our long-term debt by $13.4 million. Cash flows used in investing activities were $35.4 million in 1998. We invested $28.6 million in capital expenditures for both existing Clubs and new Club developments and we repurchased $6.8 million of our common stock at an average price of $6.14 per share. In 1999, we authorized the repurchase of an additional $4.0 million of our common stock, $3.4 million of which has been repurchased to date. Transactions with Millennium. We currently own a 60% interest in the Reebok-Sports Club/NY partnership. The Reebok-Sports Club/NY partnership makes monthly payments of $75,000 to repay the equipment loan and $167,000 to Millennium as rent. Available cash flows of the Reebok-Sports Club/NY partnership are applied as follows: (1) $3.0 million per year is used to pay a priority distribution to Millennium which is accounted for as additional rent expense; and (2) remaining cash is distributed to us as accrued management fees, to satisfy the $3.0 million note payable and as a priority distribution, which at December 31, 1998 aggregated $11.0 million. After these amounts plus interest thereon are paid, we are entitled to 60% of future cash distributions. In December 1997, we acquired four Clubs from Racquetball World. Three of these Clubs are now operated as Spectrum Clubs, and one Club was leased to another health and fitness operator in January 1999. Millennium acquired properties underlying two of the Clubs for $10.0 million and is leasing these properties to us under a financing lease agreement which is reflected as a capital lease obligation on our consolidated balance sheet. We have the right until December 2000 to purchase the leased property from Millennium for a purchase price determined pursuant to the lease (currently estimated to be approximately $10.2 million). Millennium has the right under certain circumstances to require us to acquire its interest in the property. See "Certain Relationships and Related Transactions." We have entered into an agreement to sell one of these Clubs and intend to purchase Millennium's interest in these properties with the sale proceeds. We are also developing three Clubs with Millennium as described below in "New Club Development." New Club Development. In February 1998, we signed a lease with respect to the development of a Sports Club at Rockefeller Center in New York City. We have begun to renovate the space and expect to commence pre-sale activities in late 1999 and to open the Club in the last quarter of 1999. We delivered a $4.0 million letter of credit to the landlord to secure our performance under the lease agreement. Based on preliminary estimates, we expect to spend approximately $15.7 million to complete development of this Club. 16 17 In April 1998, we acquired rights to develop a Sports Club on the site of the former Vertical Club in New York City. We issued a non-interest bearing note for $2.7 million to the seller of the Club, and are required to pay principal in two equal installments in April 1999 and April 2000. Based on preliminary estimates, we expect to spend approximately $25.6 million to complete development of this Club. We have entered into lease agreements with Millennium with respect to the development of Sports Clubs in San Francisco and Washington, D.C., and are negotiating a lease with Millennium for a Sports Club in Boston. Millennium began construction on each of these projects in 1998. Our portion of the aggregate development costs for these Clubs is currently estimated to be approximately $16.5 million. In June 1998, we acquired undeveloped land in Houston, Texas, for approximately $3.1 million, on which we intend to develop a Sports Club. Based on preliminary estimates, we expect to spend approximately $19.3 million to complete development of this Club. We are developing three Spectrum Clubs on leased sites in Southern California which are expected to open in late 1999 and early 2000. Based on preliminary estimates, we expect to spend approximately $4.3 million to complete development of these Clubs. Financing Activities. We currently have a $30.0 million credit facility which will expire May 31, 2000. In March 1999, we announced that we are privately offering $100.0 million of senior secured notes (the "Offering"). If the Offering is consummated, our credit facility would be reduced to $20.0 million and the maturity date would be extended to May 31, 2001. Advances under our credit facility bear interest at a variable rate equal to LIBOR plus 2.5% or the lender's prime rate. At December 31, 1998, the amount outstanding under our credit facility was approximately $10.9 million which accrued interest at the weighted-average rate of 7.75% per annum. The net proceeds of the Offering would be used to repay approximately $34.0 million of debt, to provide funds for future developments and for general corporate purposes. Debt would be repaid as follows:
(DOLLARS IN MILLIONS) --------------------- o The Sports Club/Irvine note............................... $ 4.3 o the Spectrum Club - Agoura Hills note..................... 2.5 o capital leases payable to Millennium related to Spectrum Clubs in Fullerton and Santa Ana......................... 10.2 o outstanding borrowing under our credit facility........... 17.0 ----- $34.0 =====
Future Capital Requirements. Other than as described herein and for normal replacement of fitness equipment and remodeling of Clubs, we have no commitments for capital expenditures. We expect to spend approximately $1.2 million during the next 12 months to upgrade our management information systems. Equipment financing has generally been available. We had equipment financing of $7.2 million outstanding at December 31, 1998. 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, generally we expect to spend approximately 4% of revenues on facility and equipment upgrades and replacements. In 1998, we invested $16.7 million in capital expenditures at existing Clubs, which included $11.7 million of major renovations at the five Clubs we acquired in 1997. Equipping new Clubs requires expenditures above this level. Our long-term capital needs are to provide funds for the developments described above, for additional development and acquisition projects and for general corporate purposes. We estimate that the net proceeds of the Offering, operating cash flows, and credit to be available under our credit facility and equipment financing would be sufficient to fund our capital expenditures in fiscal 1999 and 2000 on the projects currently under development. Acquiring and developing additional Clubs will require additional capital. If the Offering is not consummated, we will require additional financing to complete development of the clubs described above. There can be no assurance that such financing will be available. If such 17 18 financing could not be obtained, we would have to delay or eliminate certain developments, which could have a material adverse effect on us. In addition, if certain conditions are met, the terms of the Offering and our credit facility may 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 Offering and our credit facility. RECENT ACCOUNTING PRONOUNCEMENTS In April 1998, the AICPA Accounting Standards Executive Committee issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up Activities." SOP 98-5 requires that costs of start-up activities, including organization costs and Club openings, be expensed as incurred. SOP 98-5 is applicable to financial statements for fiscal years beginning after December 15, 1998. Restatement of previously issued financial statements is not permitted. In the fiscal year for which SOP 98-5 is first adopted, the application should be reported as a cumulative effect of a change in accounting principle. We will adopt SOP 98-5 effective January 1, 1999, and, accordingly, will record a one-time cumulative effect of a change in accounting principle, net of related income taxes. The amount of this charge is currently expected to be approximately $1.0 million. 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 have initiated a Year 2000 Project to bring all of our information technology ("IT") systems and non-IT systems into year 2000 compliance. Utilizing internal resources, we are in the process of defining, assessing and converting, or replacing, various programs, hardware and instrumentation systems to make them year 2000 compliant. Our IT systems include our computer equipment and software relating to membership, financial accounting and sales of products and services. Non-IT systems include our communications systems, alarm and security systems, elevators and fitness equipment. Our Year 2000 Project focuses on three IT component systems as well as non-IT systems. Membership Systems. The software programs we currently use to store membership and fee collection data and to process EFT and credit card transactions are not year 2000 compliant. We are installing a new system which is year 2000 compliant, which we expect to be in service at The Sports Club/LA and several other Clubs during the fourth quarter of 1999, and to be in service in all Clubs by the end of the first quarter of the year 2000. Because we do not anticipate installing the new membership system in all Clubs prior to the year 2000, we are also modifying our current membership systems to be year 2000 compliant. We expect these modified systems to be operational during the third quarter of 1999. Financial Accounting Systems. The supplier of the installed version of our financial accounting system has orally represented to us that the system is year 2000 compliant. In addition, we are purchasing a newer version of this system which we expect to have in place by the end of the second quarter of 1999. This newer version is certified in writing to be year 2000 compliant. Other IT Systems. We are currently reviewing all other IT systems for year 2000 compliance. Our food and beverage, sports boutique sales, private training and most other services and products systems are not year 2000 compliant, but we expect to replace or modify these systems to be year 2000 compliant during the third quarter of 1999. Non-IT Systems. We have requested vendors of our non-IT systems to advise us if such systems are year 2000 compliant where we believe such assurance to be necessary. We have received such assurances from vendors of certain systems, such as elevators, and we do not believe that the failure of other non-IT systems would have a material impact on us. We believe that we will be able to replace or modify all significant non-IT systems which are not year 2000 compliant by December 1999. 18 19 Expense of Year 2000 Project. We currently estimate that we will expend approximately $2.9 million to acquire new hardware and other equipment, acquire new membership software, upgrade our existing membership software, update our financial accounting software and make the other modifications to our IT systems described above. Most of these expenses would be incurred in order to upgrade our membership and accounting systems in the ordinary course of business. Of this amount, $800,000 has been expended to date. This expenditure will include new hardware and other equipment and software programs. We have not determined what amounts we will expend to replace non-IT systems, but we do not expect such costs to be material. Third Party Systems. We believe that the only third parties whose year 2000 problems could have a material effect on us are financial institutions that process our EFT and credit card transactions. We believe that these institutions have completed, or will complete prior to year 2000, modifications to their systems to insure year 2000 compliance; however, we are unable to test third party systems. Risks of Year 2000 Problems. The failure to correct a material year 2000 problem could interrupt our normal business activities or operations. We believe that failures in our membership, financial accounting and food and beverage systems, or performance by third parties with respect to EFT and credit card transactions, could materially and adversely affect us. While we intend to test systems supplied by third parties, such testing may not reveal all year 2000 problems. With the exception of certain critical non-IT systems which we have been assured are year 2000 compliant, we do not believe that a failure of other systems would have a material impact on us. Due to the general uncertainty inherent in the year 2000 problem, resulting in part from the uncertainty of the year 2000 readiness of third parties and the performance of systems represented to us by vendors to be year 2000 compliant, we are unable to determine at this time whether year 2000 failures will have a material impact on us. Although our Year 2000 Project is not expected to significantly reduce our level of uncertainty about year 2000 problems, including the year 2000 readiness of third parties, we believe that completion of the Year 2000 Project will reduce the possibility of significant interruptions of normal operations. A contingency plan has not yet been developed for dealing with an interruption of a critical system. We plan to develop and implement such a plan by the fourth quarter of 1999. The costs of our Year 2000 Project and the dates on which we believe we will complete the various phases of our Year 2000 Project are based upon our management's best estimates, which were derived using numerous assumptions regarding future events, including the continued availability of certain resources, third party remediation plans and other factors. There can be no assurance that these estimates will prove to be accurate, and actual results could differ materially from those currently anticipated. Specific factors that could cause such material differences include, but are not limited to, the availability and cost of personnel trained in year 2000 issues, the ability to identify, assess, remediate and test all relevant computer code and imbedded technology, performance of new systems and equipment, the reduction of productivity pending completion of employee training, the need to remediate problems caused by failures in year 2000 compliance by third parties, and similar uncertainties. 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 "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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: 19 20 o the availability and adequacy of our cash flow and financing facilities for our requirements, including payment of the notes, o 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 health and fitness club services generally and competitive pricing trends in the health and fitness market, o our ability to successfully develop new sports and fitness clubs, o disputes or other problems arising with our development partners or landlords, o changes in economic, competitive, demographic and other conditions in the geographic areas in which we operate, including business interruptions resulting from earthquakes or other causes, o competition, o changes in personnel or compensation, and o changes in statutes and regulations or legal proceedings and rulings. o We will not update forward-looking statements even though our situation will change in the future. o Year 2000 uncertainties. ITEM 8. FINANCIAL STATEMENTS INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report...................................................................... F-1 Consolidated Balance Sheets as of December 31, 1997 and 1998...................................... F-2 Consolidated Statements of Income for the Three-Year Period ended December 31, 1998............... F-3 Consolidated Statements of Stockholders' Equity for the Three-Year Period ended December 31, 1998 F-4 Consolidated Statements of Cash Flows for the Three-Year Period ended December 31, 1998........... F-5 Notes to Consolidated Financial Statements........................................................ F-6
20 21 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, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP LOS ANGELES, CALIFORNIA FEBRUARY 19, 1999 F-1 22 THE SPORTS CLUB COMPANY, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1998 (in thousands, except share amounts) ASSETS
1997 1998 --------- --------- Current assets: Cash and cash equivalents ....................................................... $ 1,581 $ 2,233 Accounts receivable, net of allowance for doubtful accounts of $385 and $215 in 1997 and 1998, respectively .................................................. 2,072 2,480 Inventories ..................................................................... 813 1,527 Other current assets ............................................................ 354 569 Due from affiliates ............................................................. 106 234 --------- --------- Total current assets ...................................................... 4,926 7,043 Property and equipment, net ........................................................ 106,791 135,269 Equity interest in unconsolidated subsidiary ....................................... 862 1,295 Costs in excess of net assets acquired, less accumulated amortization of $822 and $1,294 at December 31, 1997 and 1998, respectively ..................... 15,917 15,443 Organizational costs and other assets, net ......................................... 3,065 4,707 --------- --------- $ 131,561 $ 163,757 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of notes payable and capitalized lease obligations ......... $ 2,975 $ 7,746 Notes payable to bank ........................................................... 5,000 -- Accounts payable ................................................................ 948 2,273 Accrued liabilities ............................................................. 7,985 6,227 Deferred membership revenues .................................................... 9,936 9,953 --------- --------- Total current liabilities ................................................. 26,844 26,199 Notes payable and capitalized lease obligations, less current installments ......... 42,823 18,755 Notes payable to bank .............................................................. -- 10,940 Deferred lease obligations ......................................................... 2,817 2,724 Minority interest .................................................................. 600 600 --------- --------- Total liabilities ......................................................... 73,084 59,218 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; 14,382,621 and 20,896,623 shares issued and outstanding at December 31, 1997 and 1998, respectively ..................................... 144 209 Additional paid-in capital ...................................................... 53,613 102,361 Retained earnings ............................................................... 5,674 9,656 Treasury stock, at cost, 163,976 and 1,258,691 shares at December 31, 1997 and 1998, respectively ..................................... (954) (7,687) --------- --------- Total stockholders' equity ................................................ 58,477 104,539 --------- --------- $ 131,561 $ 163,757 ========= =========
See accompanying notes to consolidated financial statements. F-2 23 THE SPORTS CLUB COMPANY, INC. CONSOLIDATED STATEMENTS OF INCOME Three-Year Period Ended December 31, 1998 (in thousands, except per share amounts)
1996 1997 1998 ---------- ---------- ---------- Revenues ...................................................... $ 36,918 $ 61,154 $ 81,923 Operating expenses: Direct ..................................................... 22,989 43,517 56,746 Selling, general and administrative ........................ 6,052 6,607 8,556 Depreciation and amortization .............................. 2,490 3,919 5,282 ---------- ---------- ---------- Total operating expenses .............................. 31,531 54,043 70,584 ---------- ---------- ---------- Income from operations ............................. 5,387 7,111 11,339 Other income (expense): Interest ................................................... (2,682) (3,206) (1,629) Minority interests ......................................... (150) (22) (150) Equity interest in net income of unconsolidated subsidiaries 631 696 880 Non-recurring items ........................................ (300) (2,025) (314) ---------- ---------- ---------- Income before income taxes and extraordinary charge . 2,886 2,554 10,126 Provision for income taxes .................................... 1,183 1,014 3,971 ---------- ---------- ---------- Net income before extraordinary charge .............. 1,703 1,540 6,155 Extraordinary charge from early extinguishment of debt, net of income tax effect of $1,331 ........................ -- -- 2,173 ---------- ---------- ---------- Net income .......................................... $ 1,703 $ 1,540 $ 3,982 ========== ========== ========== Net income per share before extraordinary charge: Basic ...................................................... $ 0.15 $ 0.12 $ 0.33 ========== ========== ========== Diluted .................................................... $ 0.15 $ 0.12 $ 0.33 ========== ========== ========== Per share effect of extraordinary charge: Basic ...................................................... $ -- $ -- $ (0.12) ========== ========== ========== Diluted .................................................... $ -- $ -- $ (0.12) ========== ========== ========== Net income per share: Basic ...................................................... $ 0.15 $ 0.12 $ 0.21 ========== ========== ========== Diluted .................................................... $ 0.15 $ 0.12 $ 0.21 ========== ========== ========== Weighted average number of common shares outstanding: Basic ...................................................... 11,355 12,524 18,603 ========== ========== ========== Diluted .................................................... 11,360 12,683 18,829 ========== ========== ==========
See accompanying notes to consolidated financial statements. F-3 24 THE SPORTS CLUB COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three-Year Period Ended December 31, 1998 (in thousands)
Common Stock Additional Treasury Stock ------------------------ Paid-in Retained ------------------------- Shares Amount Capital Earnings Shares Amount ---------- ---------- ---------- ---------- ---------- ---------- Balance January 1, 1996 .................. 11,355 $ 114 $ 36,927 $ 2,450 -- -- Net income ........................... -- -- -- 1,703 -- -- Issuance of common stock to outside directors .......................... 3 -- 8 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 ............... 11,358 114 36,935 4,153 -- -- Net income ........................... -- -- -- 1,540 -- -- Sale of common stock ................. 2,730 27 14,973 -- -- -- Issuance of common stock in connection with acquisition of The Sports Club/ Las Vegas .......................... 291 3 1,672 -- -- -- Treasury stock repurchased ........... -- -- -- -- 185 $ (1,034) Reissuance of treasury stock for employee stock plans ............... -- -- -- (19) (21) 80 Issuance of common stock to outside directors .......................... 4 -- 33 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance, December 31, 1997 ............... 14,383 $ 144 $ 53,613 $ 5,674 164 $ (954) 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) ========== ========== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 25 THE SPORTS CLUB COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three-year Period Ended December 31, 1998 (in thousands)
1996 1997 1998 ---------- ---------- ---------- Cash flows from operating activities: Net income ........................................................ $ 1,703 $ 1,540 $ 3,982 Adjustments to reconcile net income to cash provided by operating activities: Loss on early extinguishment of debt, net of tax ............ -- -- 2,173 Depreciation and amortization ............................... 2,490 3,919 5,282 Accrued management fees ..................................... (97) -- -- Equity interest in net income of unconsolidated subsidiaries (631) (696) (880) Distributions from unconsolidated subsidiaries .............. 623 469 447 Stock issued as directors' fees ............................. 8 33 38 Loss on sale of Sports Connections .......................... 300 -- -- Minority interest in Reebok Sports Club/NY .................. -- (128) -- (Increase) decrease in: Accounts receivable, net ................................. 149 (1,176) (408) Inventories .............................................. 105 (395) (714) Other current assets ..................................... (12) (2,187) (830) Increase (decrease) in: Accounts payable ......................................... (816) (493) 1,325 Accrued liabilities ...................................... 225 2,519 (315) Deferred membership revenues ............................. (633) 1,635 17 Deferred lease obligations ............................... 211 (492) (93) ---------- ---------- ---------- Net cash provided by operating activities ................ 3,625 4,548 10,024 Cash flows from investing activities: Capital expenditures .............................................. (2,788) (4,899) (28,623) Business acquisitions, net of cash acquired ....................... (2,118) (10,778) -- Proceeds from sale of Sports Connections .......................... 3,569 -- -- Sale of other non-operating assets ................................ 95 -- -- Treasury stock acquired ........................................... -- (1,034) (6,800) ---------- ---------- ---------- Net cash used for investing activities ................... (1,242) (16,711) (35,423) Cash flows from financing activities: (Increase) decrease in due from affiliates ........................ 540 937 (128) Exercise of employee stock options ................................ -- -- 26 Proceeds from sale of common stock ................................ -- 10,000 48,704 Proceeds from notes payable and capitalized lease obligations ..... 23,371 2,324 10,940 Repayments of notes payable and capitalized lease obligations ..... (23,693) (3,663) (33,491) ---------- ---------- ---------- Net cash provided by financing activities ................ 218 9,598 26,051 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ..... 2,601 (2,565) 652 Cash and cash equivalents at beginning of year ....................... 1,545 4,146 1,581 ---------- ---------- ---------- Cash and cash equivalents at end of year ............................. $ 4,146 $ 1,581 $ 2,233 ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid during the year for interest ............................ $ 3,068 $ 3,599 $ 2,636 ========== ========== ========== Cash paid during the year for income taxes ........................ $ 590 $ 306 $ 1,881 ========== ========== ========== Capital expenditures financed ..................................... $ 153 $ 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 $ -- ========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 26 THE SPORTS CLUB COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1997 AND 1998 1. ORGANIZATION The Sports Club Company, Inc. (the "Company") operates sports and fitness Clubs ("Clubs"), under the "Sports Club" and "Spectrum Club" names. Sports Clubs have been developed as "urban country clubs" offering a full range of services including numerous fitness and recreation options, diverse facilities and other amenities. Spectrum Clubs are designed as smaller-scale Sports Clubs with an extensive range of services. Both Sports Clubs and Spectrum Clubs are marketed to affluent, health conscience individuals who desire a premier Club. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition The Company receives a one-time non-refundable initiation fee and monthly 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 For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost or market using the average cost method. Depreciation and Amortization Depreciation is computed primarily using the straight-line method over the estimated useful lives of the assets, ranging from five to seven years for equipment and 30 to 40 years for buildings. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the improvements. Loan costs are amortized over the terms of the related loans and organizational costs are amortized over five years. 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 will adopt 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 F-6 27 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 will record a one-time charge equal to the unamortized balance of all capitalized development and start-up costs as of January 1, 1999. This charge will be recorded as a cumulative effect of a change in accounting principle net of the related income tax effect. The amount of this charge is currently expected to be approximately $1.0 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, 1998. 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. 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, 1998. The carrying amounts related to cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate fair value due to the relatively short maturity of such instruments. The fair value of long-term debt is estimated by discounting the future cash flows of each instrument at rates currently available to the Company for similar debt instruments of comparable maturities by the Company's bankers. F-7 28 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 will adopt 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 may impact the Company's accounting for its membership software system currently being implemented. The Company has not yet determined whether the application of SOP 98-1 will have a material impact upon the Company's financial position or results of operations. 3. ACQUISITIONS Sports Clubs On December 30, 1996, the Company acquired an additional 10.1% interest in the Reebok-Sports Club/NY partnership for $2.5 million which increased the Company's ownership in the partnership to 50.1%. This acquisition was accounted for as a purchase and accordingly, the operations of the Club are included in the Company's consolidated statements of income from the date of acquisition. Prior to this acquisition, the Company's interest was recorded under the equity method of accounting. Goodwill of approximately $3.8 million resulted from this transaction. On June 23, 1997, the Company completed the sale of 2,105,263 shares of its Common Stock to Millennium Entertainment Partners L.P., (including affiliated entities, hereafter referred to as "Millennium"). In exchange for the newly issued shares, the Company received $5.0 million cash, Millennium's 9.9% Partnership interest in The Reebok-Sports Club/NY Partnership, a $2.5 million note due from the Partnership and Millennium's rights to certain accrued management fees due from the Partnership. This transaction increased the Company's ownership in the Partnership to 60%. The Company also signed definitive leases with Millennium to jointly develop Sports Clubs in Washington D.C. and San Francisco, California on properties currently under development by Millennium. The Company has also signed a letter of intent to develop a Sports Club in Boston, Massachusetts on property currently under development by Millennium. On August 1, 1997, the Company acquired a Club in Henderson, Nevada which is now operated as The Sports Club/Las Vegas. The purchase price of approximately $6.7 million consisted of $5.0 million in cash and 290,358 shares of the Company's Common Stock, valued at approximately $1.7 million. The acquisition was accounted for as a purchase. Accordingly, the operations of The Sports Club/Las Vegas are included in the Company's statement of income from the date of acquisition. Spectrum Clubs On December 31, 1997, the Company acquired four Clubs from Racquetball World, which are now operated as Spectrum Clubs, for a total purchase price (including the portion paid by Millennium described below) of approximately $19.4 million. Millennium acquired properties underlying two of the Clubs for $10.0 million and is leasing these two properties to the Company under a financing lease agreement which is reflected as capitalized lease obligations in the Company's consolidated balance sheet. At any time during the first three years of the lease the Company may purchase the leased property from Millennium for a purchase price determined pursuant to the lease, currently estimated to be approximately F-8 29 $10.2 million. Millennium has the right to require the Company to acquire its interest in the property upon the occurrence of certain events defined in the lease. A cash payment of approximately $6.0 million was made to the sellers and their creditors and the Company assumed approximately $2.0 million of liabilities. In addition, up to 159,081 shares of the Company's Common Stock valued at approximately $1.4 million will be issued to certain of the selling entities, subject to reduction if certain liabilities of the Clubs exceed agreed-upon amounts. In a private placement completed in December 1997, the Company sold 625,000 shares of its Common Stock to Millennium for $5.0 million to raise funds to complete this acquisition. The acquisition was accounted for as a purchase. Accordingly, the operations of these four Clubs are included in the Company's statement of operations from the date of acquisition. SportsMed 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. The following pro forma financial data present the Company's unaudited pro forma statement of income for the year ended December 31, 1997, giving effect to the Reebok-Sports Club/NY, The Sports Club/Las Vegas and the four Spectrum Club acquisitions as if these transactions had occurred on January 1, 1997. None of the acquisitions was considered to be significant individually or in the aggregate under the applicable rules of the Securities and Exchange Commission. The STS operation is not material to the consolidated statement of income, and accordingly, its impact has been excluded from the following pro forma presentation. The unaudited pro forma condensed statement of income does not purport to represent what the Company's actual results of operations would have been had such transactions in fact occurred on such date. The unaudited pro forma condensed statement of income also does not purport to project the results of operations of the Company for any future period.
Year ended December 31, 1997 ----------------- (Unaudited) (in thousands, except per share data) Revenues ................................................ $ 72,707 Operating expenses ...................................... 65,944 ---------- Income from operations .................................. 6,763 Other expenses .......................................... 6,159 ---------- Income before provision for income taxes ................ 604 Provision for income taxes .............................. 273 ---------- Net income .............................................. $ 331 ========== Net income per share: Basic ................................................. $ .02 ========== Diluted ............................................... $ .02 ========== Weighted average number of common shares outstanding: Basic ................................................. 14,456 ========== Diluted ............................................... 14,615 ==========
F-9 30 4. PROPERTY AND EQUIPMENT Property and equipment is carried at cost, less accumulated depreciation, which is summarized as follows:
At December 31, ---------------------------- 1997 1998 ---------- ---------- (in thousands) Land ........................................... $ 18,234 $ 21,484 Building and improvements ...................... 82,405 107,000 Furniture, fixtures and equipment ............. 14,095 19,305 ---------- ---------- 114,734 147,789 Less accumulated depreciation and amortization.. 7,943 12,520 ---------- ---------- Net property and equipment ..................... $ 106,791 $ 135,269 ========== ==========
Equipment under capital leases was $7,456,000 and $10,479,000 and related accumulated amortization was $1,854,000 and 3,271,000 at December 31, 1997 and 1998, respectively. Included in buildings and improvements at December 31, 1997 and 1998, is $10,000,000 of buildings acquired under a capital lease in connection with the acquisition of four Spectrum Clubs (See Note 3). No amortization was recorded for the year ending December 31, 1997 due to the close proximity of the acquisition to the end of the year. Accumulated amortization at December 31, 1998 was $255,000. 5. NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS Notes payable and capitalized lease obligations are summarized as follows:
At December 31, 1997 1998 ---------- ---------- (in thousands) The Sports Club/LA note (a) ......................... $ 22,378 $ -- The Sports Club/Irvine note (b) ..................... 4,875 4,375 Spectrum Club - Agoura Hills note (c) .............. 2,533 2,506 Spectrum Clubs Fullerton and Santa Ana lease (d) ... 10,000 9,745 Equipment financing loans (e) ....................... 5,602 7,208 Other notes payable ................................. 410 2,667 ---------- ---------- 45,798 26,501 Less current installments ........................... 2,975 7,746 ---------- ---------- $ 42,823 $ 18,755 ========== ==========
(a) The Sports Club/LA note was at a 10.63% rate of interest and required a monthly payment of approximately $262,000 with a balloon payment of approximately $17.5 million on April 1, 2003. In April 1998 the Company pre-paid this note and incurred a prepayment penalty of $3.5 million. The prepayment penalty has been recorded as an extraordinary charge on the accompanying statement of income, recorded net of its income tax effect of $1.3 million. (b) The Sports Club/Irvine note was issued to previous owners of this Club. The note is secured by land, equipment, building improvements and the building of The Sports Club/Irvine, bears interest at the rate of 6%, and requires quarterly principal payments of $125,000 and a balloon payment of $4.0 million on November 1, 1999. (c) The Spectrum Club - Agoura Hills note was issued by a savings and loan association to complete the Company's acquisition of the Spectrum Club - Agoura Hills. The note is secured by land, equipment, building improvements and the building of the Spectrum Club - Agoura Hills. The note bears interest at the rate of 8.5%. Monthly principal and interest payments of $20,107 are required through the note's maturity in April 2024. F-10 31 (d) In December 1997, the Company acquired four Spectrum Clubs. Millennium acquired properties underlying two of the Clubs for $10.0 million and is leasing these two properties to the Company under a financing lease agreement which is reflected as a capital lease obligation in the Company's consolidated balance sheet. (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%. Future minimum annual principal payments at December 31, 1998, are as follows (in thousands): 1999........................................... $ 7,746 2000........................................... 3,906 2001........................................... 1,819 2002........................................... 1,342 2003........................................... 849 Thereafter..................................... 10,839 -------- $ 26,501 ========
6. BANK CREDIT FACILITY At December 31, 1998, the Company had a $30.0 million bank credit facility. At that date, $10.9 million was outstanding and an additional $4.0 million was utilized in the form of a letter of credit. The loans are unsecured, however, the Company is prohibited from pledging any of its assets except for normal furniture, fixture and equipment financing. The agreement also requires the Company to maintain certain Tangible Net Worth, Debt Coverage Ratios and Senior Liabilities to Tangible Net Worth Ratio requirements. The Company was in compliance with its covenants as of December 31, 1998. (See Note 13). 7. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases certain facilities pursuant to various operating lease agreements. The Club facility leases are generally long-term and noncancelable triple-net leases (requiring the Company to pay all real estate taxes, insurance and maintenance expenses), and have an average remaining term of 35 years, including renewal options, with the earliest expiration date of March 30, 2000. Future minimum noncancelable operating lease payments as of December 31, 1998 are as follows (in thousands): Year ending December 31: 1999...................................... $ 10,968 2000...................................... 16,870 2001...................................... 22,551 2002...................................... 22,780 2003...................................... 23,345 Thereafter................................ 313,538 -------- Total minimum lease payments......... $410,052 ========
Rent expense for facilities and equipment aggregated, $1,960,000, $7,438,000 and 8,174,000 for the years ended December 31, 1996, 1997 and 1998, respectively. F-11 32 Litigation The Company is involved in various claims and lawsuits incidental to its business, including claims arising from accidents and disputes with landlords. However, in the opinion of management, the Company is adequately insured against such claims and lawsuits involving personal injuries, and any ultimate liability arising out of any such proceedings will not have a material adverse effect on the financial condition, cash flow or operations of the Company. Employment Agreements The Company currently has employment agreements with three key executive officers which expire in 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. 8. INCOME PER SHARE The following is a reconciliation of the basic and diluted income per share computations for the years 1996, 1997 and 1998:
Year ended December 31, -------------------------------------------- 1996 1997 1998 ---------- ---------- ---------- (in thousands, except per share data) Net income used for basic and diluted income per share ........... $ 1,703 $ 1,540 $ 3,982 ========== ========== ========== Shares of Common Stock and Common Stock equivalents: Weighted average shares used in basic computation .......... 11,355 12,524 18,603 Weighted stock options ......... 5 159 226 ---------- ---------- ---------- Impact from dilutive shares .... 11,360 12,683 18,829 ========== ========== ========== Income per share: Basic .............................. $ 0.15 $ 0.12 $ 0.21 ========== ========== ========== Diluted ............................ $ 0.15 $ 0.12 $ 0.21 ========== ========== ==========
F-12 33 9. INCOME TAXES The provision for income taxes consists of the following:
Year ended December 31, ---------------------------------------------- 1996 1997 1998 ---------- ---------- ---------- (in thousands) Current: Federal .............. $ 985 $ 842 $ 2,893 State ................ 280 255 839 ---------- ---------- ---------- 1,265 1,097 3,732 ---------- ---------- ---------- Deferred: Federal .............. (78) (78) 156 State ................ (4) (5) 83 ---------- ---------- ---------- (82) (83) 239 ---------- ---------- ---------- Income tax provision ...... $ 1,183 $ 1,014 $ 3,971 ========== ========== ========== Tax benefit from extraordinary charge: Federal................................................... $ (1,021) State..................................................... (310) ---------- Total provision from extraordinary charge...................... $ (1,331) ==========
Income tax expense from net income before income taxes and extraordinary charge differs from the statutory rate as applied to net income before income taxes and extraordinary charge as follows:
Year ended December 31 ---------------------------------------------- 1996 1997 1998 ---------- ---------- ---------- (in thousands) Computed "expected" tax expense .............. $ 981 $ 868 $ 3,443 Increase (decrease) in tax resulting from: State taxes - net of federal benefit ...... 182 165 609 Meals and entertainment ................... 7 8 8 Goodwill amortization ..................... 65 80 80 Other ..................................... (52) (107) (169) ---------- ---------- ---------- Income tax provision ......................... $ 1,183 $ 1,014 $ 3,971 ========== ========== ==========
The effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented as follows:
At December 31, ---------------------------- 1997 1998 ---------- ---------- (in thousands) Deferred tax assets: Deferred initiation fees ............... $ 688 $ 811 Accrued vacation ....................... 142 182 Bad debt ............................... 154 86 State taxes ............................ 44 180 ---------- ---------- Gross deferred tax assets ........ 1,028 1,259 ---------- ---------- Deferred tax liabilities: Depreciation and amortization .......... (3,419) (3,889) Other .................................. (542) (542) ---------- ---------- Gross deferred tax liabilities ... (3,961) (4,431) ---------- ---------- Net deferred tax liability ................. $ (2,933) $ (3,172) ========== ==========
F-13 34 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:
Year ended December 31 ------------------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Net income: As reported ..... $ 1,703 $ 1,540 $ 3,982 Pro forma ....... $ 1,533 $ 1,368 $ 3,504 Basic income per share: As reported ..... $ .15 $ .12 $ .21 Pro forma ....... $ .14 $ .11 $ .19
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 1996, 1997 and 1998 respectively: dividend yield of 0%, 0% and 0%; expected volatility of 51.3%, 62.1%, and 71.4% risk-free interest rates of 7.0%, 6.5% and 6.0% and expected economic lives of 7.0 years, 6.0 years and 5.9 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 the 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. F-14 35 A summary of the status of the Company's stock option plans as of December 31, 1996, 1997 and 1998 and changes during the years then ended are presented below:
Weighted Average Exercise Shares Price ---------- ---------- Outstanding at January 1, 1996 ..................... 297,000 $ 5.06 Granted ............................................ 220,500 2.66 Canceled ........................................... 25,000 3.18 ---------- Outstanding at December 31, 1996 ................... 492,500 3.17 ========== Options excercisable at December 31, 1996 .......... 185,505 3.28 ========== Weighted-average per share fair value of options granted during year ended December 31, 1996 ...... 1.75 Outstanding at January 1, 1997 ..................... 492,500 3.17 Granted ............................................ 155,000 5.51 Canceled ........................................... 5,000 3.10 ---------- Outstanding at December 31, 1997 ................... 642,500 3.77 ========== Options excercisable at December 31, 1997 .......... 334,512 3.23 ========== Weighted-average 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 excercisable 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
The following table summarizes information about stock options outstanding at December 31, 1998:
Weighted Average Remaining Exercise Number Contractual Options Prices Outstanding Life (Years) Exercisable - -------- ----------- ------------ ----------- $8.3750 27,000 8.84 9,008 5.3750 68,000 8.50 22,672 4.3750 60,000 8.22 20,000 2.7500 55,666 7.83 36,349 2.5625 58,832 7.40 37,000 2.6875 70,000 7.17 46,667 3.0000 225,000 6.58 225,000 5.2500 66,000 6.25 66,000 8.2500 30,000 4.32 -- 8.0000 302,000 9.28 -- 7.0000 10,000 9.54 -- -------- -------- 972,498 462,696 ======== ========
F-15 36 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, 1998, 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, 1998, no purchase rights had been granted. In July 1994, the Company instituted its 1994 Stock Compensation Plan for the purpose of compensating outside directors by issuing them shares of the Company's Common Stock as part of their directors' fees. A total of 50,000 shares are reserved for issuance pursuant to this plan. A total of 16,000 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. The Company manages the operation of its unconsolidated subsidiary, the Spectrum Club - Manhattan Beach, of which it owns a 46.1% interest. The Company receives a fee of $33,322 per month plus 4.5% of the Club's gross revenues for managing this Club. The Company also manages the operations of the Reebok Sports Club/NY and receives a fee of approximately 5.87% of the gross monthly collections, as defined. Management fees relating to Reebok Sports Club/NY of $779,000 for the year ended December 31, 1996 were earned and included in the Company's income statement. Management fees of $1.1 million and $1.3 million relating to Reebok Sports Club/NY were earned for the year ended December 31, 1997 and 1998. These amounts are eliminated from income and expense in the presentation of the Company's 1997 and 1998 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 and Washington D.C., and is currently negotiating with Millennium with respect to the development of a Sports Club in Boston. 12. CONCENTRATION OF CREDIT RISK The Company markets its products principally to customers in Southern California, New York City and Las Vegas. Management performs regular evaluations concerning the ability of its customers to satisfy their obligations and records a provision for doubtful accounts based upon these evaluations. The Company's credit losses for the periods presented are insignificant and have not exceeded management's estimates. 13. SUBSEQUENT EVENTS The Company has commenced an offering of Senior Secured Notes due in 2006. Estimated proceeds of such offering are expected to be used to repay long-term debt, fund new club development and for general corporate purposes. Upon completion of the offering, the Company anticipates reducing its bank credit facility to $20.0 million. There can be no assurance the offering will be completed. In 1999, the Company approved an additional $4.0 million for use in the continuation of its plan to repurchase shares of Common Stock. At February 19, 1999, 818,000 shares have been repurchased for $3.4 million. F-16 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not applicable PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following provides certain information regarding our directors and executive officers:
NAME AGE POSITION - ---- --- -------- D. Michael Talla....................... 52 Chairman of the Board and Chief Executive Officer John M. Gibbons........................ 50 President, Chief Operating Officer and Director Nanette Pattee Francini................ 50 Executive Vice President and Director Timothy M. O'Brien..................... 47 Chief Financial Officer and Assistant Secretary Philip J. Swain........................ 41 Vice President Operations Mark S. Spino.......................... 44 Vice President Development Brian J. Collins....................... 38 Director Rex A. Licklider....................... 55 Vice Chairman of the Board Andrew L. Turner....................... 52 Director Dennison T. Veru....................... 38 Director
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 and has served as our Chief Executive Officer and Chairman of the Board since our inception in 1994. 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 20 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. John M. Gibbons was hired to serve as our Chief Financial Officer in May 1994 and became Executive Vice President in February 1995 and President and Chief Operating Officer in July 1995. He has been one of our directors since 1995. From September 1993 until May 1994, Mr. Gibbons was a self-employed financial and business consultant whose clients included us. From February 1990 until September 1993, Mr. Gibbons was employed as a Vice President by Com Systems, Inc., a publicly traded long-distance telecommunications company located in Westlake Village, California, serving as General Manager and Senior Vice President from December 1992 to September 1993, and as Chief Financial Officer from August 1991 through December 1992. He holds a Bachelor of Business Administration from Notre Dame and a Masters of Business Administration from the University of Southern California. Mr. Gibbons is a Certified Public Accountant. 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 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 20 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 hired 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 21 38 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 located in Westlake Village, California. Mr. O'Brien has a Bachelor of Business Administration degree from the University of Wisconsin-Madison and is a Certified Public Accountant. Philip J. Swain has served as Vice President Operations since our inception. Mr. Swain has been in the sports and fitness industry for more than 20 years and has developed or participated in the development of more than 15 sports and fitness clubs in the United States, including many of our current Clubs. Mark S. Spino has served as our Vice President Development since our inception. Mr. Spino has been in the sports and fitness industry for more than 15 years and has developed or participated in the development of more than 15 sports and fitness clubs in the United States, including many of 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. Beginning in June 1997, he has been a principal of Millennium Partners Management LLC. From March 1993 to November 1996, Mr. Collins was Senior Vice President at Carol Management Corp., an owner and operator of real estate and hotel properties. 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." Rex A. Licklider has been 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. 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. Since November 1992, he has been President 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. Mr. Veru also serves as a director of Lois USA, Inc., a publicly traded company. He is a graduate of Franklin and Marshall College. Directors who are not employees of The Sports Club Company 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 1,000 shares of our common stock pursuant to our 1994 Stock Compensation Plan, which has been increased to 2,000 shares for 1999, subject to receipt of stockholder approval of an amendment to the 1994 Stock Compensation Plan. 22 39 Our directors are divided into three classes having terms expiring at the annual stockholders meetings in 1999 (Ms. Pattee Francini and Mr. Veru), 2000 (Messrs. Talla and Licklider) and 2001(Messrs. Turner, Gibbons and Collins), 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 practices. The Compensation Committee, also composed of Messrs. Collins, Turner and Veru, recommends to the Board of Directors compensation for key employees and administers the 1994 Stock Incentive Plan. CERTAIN TRANSACTIONS Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the 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 1998 have been made, except that as a result of administrative oversight, a report relating to a single transaction by Andrew L. Turner was filed late. 23 40 ITEM 11. EXECUTIVE COMPENSATION The table below shows, for the last three fiscal years, the amount of compensation earned by the 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."
LONG-TERM COMPENSATION ANNUAL COMPENSATION SHARES ALL OTHER -------------------------- UNDERLYING COMPENSATION NAME & POSITION YEAR SALARY($)(a) BONUS($) OPTIONS AWARDS(#) ($)(b) - --------------- ---- ------------ -------- ----------------- ------------ D. Michael Talla.......... 1998 $ 243,000(c) $45,000 30,000 $ 3,168 Chief Executive Officer 1997 239,250(c) -- -- 3,135 And Chairman of the Board 1996 218,000(c) -- -- -- Nanette Pattee Francini... 1998 154,800 35,000 30,000 825 Executive Vice President 1997 145,100 10,000 15,000 -- And Director 1996 124,175 -- 15,000 -- John M. Gibbons........... 1998 264,108(d) 42,000 30,000 2,534 President, Chief Operating 1997 245,883(d) 25,000 -- 2,637 Officer and Director 1996 232,800(d) 25,000 225,000 2,256 Mark S. Spino............. 1998 145,000 35,000 30,000 2,775 Vice President of 1997 134,125 10,000 15,000 -- Development 1996 116,795 -- 15,000 -- Philip J. Swain........... 1998 155,000 35,000 30,000 2,063 Vice President of 1997 146,031 15,000 15,000 908 Operations 1996 131,375 -- 25,000 -- Timothy M. O'Brien........ 1998 146,300 35,000 30,000 3,168 Chief Financial Officer 1997 137,667 10,000 15,000 2,807 And Assistant Secretary 1996 122,175 5,000 20,000 1,791
- ---------- (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, 1998 closing market price of $3 15/16 per share, on the American Stock Exchange. (c) Mr. Talla also receives, on an annual basis, 49.9% of the first $300,000 of The Sports Club/LA's net cash flow. This amount is not included in Mr. Talla's compensation. See "Certain Relationships and Related Transactions." (d) Includes an allowance for living expenses paid to Mr. Gibbons under the terms of his employment agreement. OPTION GRANTS, EXERCISES AND YEAR-END VALUES The following table describes option grants to the Named Executive Officers during the last fiscal year.
% OF TOTAL POTENTIAL REALIZABLE OPTIONS VALUE AT ASSUMED SHARES GRANTED ANNUAL RATES OF STOCK UNDERLYING TO EXERCISE PRICE APPRECIATION FOR OPTIONS EMPLOYEES PRICE EXPIRATION OPTION TERM(b) NAME GRANTED(#)(a) FOR 1998 ($/SH) DATE 5%($) 10%($) - ---- ------------- --------- -------- ---------- ---------- -------- D. Michael Talla......... 30,000 8.77% $ 8.25 4/27/2003 $ 155,651 $ 394,451 Nanette Pattee Francini.. 30,000 8.77 8.00 4/14/2008 150,935 382,498 John M. Gibbons.......... 30,000 8.77 8.00 4/14/2008 150,935 382,498 Mark S. Spino............ 30,000 8.77 8.00 4/14/2008 150,935 382,498 Phillip J. Swain......... 30,000 8.77 8.00 4/14/2008 150,935 382,498 Timothy M. O'Brien....... 30,000 8.77 8.00 4/14/2008 150,935 382,498
- ---------- 24 41 (a) All grants are incentive stock options granted under the terms of our 1994 Stock Incentive Plan, at an exercise price equal to or greater than 100% of the fair market value of our common stock on the date of grant. Except for the options granted to Mr. Talla, which expire five years from the date of grant, 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 below 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, 1998.
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 (#) (#) ($) ($) - ---- ----------- ------------- ----------- ------------- D. Michael Talla........ 0 30,000 $ 0 $ 0 Nanette Pattee Francini. 15,000 45,000 12,500 6,250 John M. Gibbons......... 225,000 30,000 210,937 0 Mark S. Spino........... 15,000 45,000 12,500 6,250 Philip J. Swain......... 21,667 48,333 20,834 10,416 Timothy M. O'Brien...... 43,334 46,666 16,459 8,228
- ---------- (a) All options were granted under our 1994 Stock Incentive Plan. (b) The in-the-money options had exercise prices of less than the $3 15/16 closing price of our common stock on the American Stock Exchange on December 31, 1998. The calculations of value assume exercise of the options on December 31, 1998 at the price of $3 15/16 per share. 25 42 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 expire on December 31, 2000. Certain terms of Mr. Talla's employment agreement were amended by the Board of Directors as of February 27, 1995. The agreements provide for annual compensation of $200,000 payable to Mr. Talla, and $115,000 payable to Ms. Pattee Francini, subject to upward adjustment at the discretion of the Board of Directors. In 1997, the Compensation Committee of the Board of Directors increased Mr. Talla's annual salary to $225,000 and in 1998 Ms. Pattee Francini's annual salary was increased to $155,000. 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 of us; (iv) any person becomes the beneficial owner directly or indirectly of 25% or more of our outstanding common stock; or (v) a change 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 performance bonus), the aggregate approximate amounts payable to Mr. Talla and Ms. Pattee Francini would be $757,046 and $486,173, respectively. Effective June 1, 1998, we entered into an employment agreement with Mr. Gibbons which will remain in effect until terminated as described below. The agreement provides for an annual base salary of $250,000, subject to annual review and upward adjustment at the discretion of the Board of Directors, and entitles Mr. Gibbons to participate in any management bonus program the Board of Directors may implement from time to time. Additionally, Mr. Gibbons receives $40,000 for living expenses each year, and a car allowance. The Board, in its discretion, may also award him a bonus of up to twenty percent (20%) of his annual gross base salary. Pursuant to the agreement, effective April 15, 1998, the Compensation Committee of the Board of Directors granted Mr. Gibbons an incentive stock option to purchase 30,000 shares of our common stock at an exercise price of $8.00 per share, vesting in three equal installments on April 15 of 1999, 2000 and 2001 or earlier, upon a change of control (as defined in the agreement). We may terminate the agreement without cause, if Mr. Gibbons dies or becomes disabled and may also terminate it with "cause," if Mr. Gibbons participates in conduct materially harmful to us, is adjudged 26 43 guilty of a felony, demonstrates gross inattention to his duties, breaches any fiduciary duty to us or violates any material term of the agreement. Mr. Gibbons may also terminate the agreement without cause at any time. If Mr. Gibbons is terminated by us other than for "cause," he will be entitled to receive one year of severance pay at his base salary in effect on the date of termination. We do not have written employment agreements with Messrs. Spino, Swain and O'Brien, who currently receive annual base salaries of $150,000, $160,000 and $150,000, respectively. 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 1,000 shares of our Common Stock each year pursuant to the Company's 1994 Stock Compensation Plan, which has been increased to 2,000 shares for 1999, subject to receipt of stockholder approval of an amendment to the 1994 Stock Compensation Plan. Messrs. Licklider, Collins, Turner and Veru currently serve on the Board as 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 $37,026 during 1996, $48,783 during 1997 and $53,320 during 1998. Under the 1994 Stock Compensation Plan an aggregate of 16,000 shares of Common Stock were issued to non-employee directors through December 31, 1998. COMPENSATION OF COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board ("Committee") administers the executive compensation. Mr. Licklider was appointed Chairman on July 8, 1994, and served continuously until August 1, 1996, when he resigned to become a paid consultant to us. Mr. Turner has been a member of the Committee since September 13, 1994, and became its Chairman on February 27, 1995. Mr. Veru was appointed to the Committee on February 20, 1996, and Mr. Collins was appointed on April 10, 1998. None of these individuals has ever been an officer or employee. 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, 1999 by our directors and executive officers. It also shows other individuals or entities that beneficially owned more than 5% of the 18,819,931 outstanding shares of our common stock.
TOTAL AND PERCENT OF SHARES OPTIONS SHARES HELD STOCK OUTSTANDING NAME AND ADDRESS OWNED EXERCISABLE UNDER ------------------------ OF BENEFICIAL OWNER(a) DIRECTLY(b) WITHIN 60 DAYS(c) 401-K PLAN NUMBER PERCENT ---------------------- ----------- ----------------- ----------- ----------- --------- D. Michael Talla................. 4,424,198 10,000 1,144 5,199,119(d) 27.63%(d) Nanette Pattee Francini.......... 256,107 35,000 210 5,199,119(d) 27.63%(d) Mark S. Spino.................... 227,969 35,000 705 5,199,119(d) 27.63%(d) Philip J. Swain.................. 163,164 45,000 622 5,199,119(d) 27.63%(d) John M. Gibbons.................. 48,500 235,000 1,712 285,212 1.52% Timothy O'Brien.................. 2,600 63,334 865 66,799 * The Licklider Living Trust Dated May 2, 1986.............. 1,305,662 -- -- 1,305,662 6.94% Andrew L. Turner................. 75,000 -- -- 75,000 * Dennison T. Veru................. 23,000 -- -- 23,000 * Brian J. Collins................. 33,001 -- -- 33,001 * All Directors and Executive Officers as a Group (10 persons).................... 6,559,201 423,334 5,258 6,987,793 37.13% Millennium(e).................... 4,620,963 -- -- 4,620,963 24.55% Baron Capital Group, Inc.(f)..... 1,650,000 -- -- 1,650,000 8.77%
- ---------- * Less than 1% 27 44 (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 9, 1999. (d) 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:
SHARES TOTAL SHARES HELD HELD NAMED PERSON DIRECTLY (SEE ABOVE TABLE) ------------ --------- ----------------- D. Michael Talla: Individually..................................... 4,274,961 Spouse........................................... 30,953 Trusts for two minor children.................... 129,428 --------- Total................................................ 4,435,342 Nanette Pattee Francini...................................... 291,317 Mark S. Spino................................................ 263,674 Philip J. Swain.............................................. 208,786 --------- All Parties to Voting Agreement...................... 5,199,119 =========
(e) The Millennium shares are held by the following affiliates: 1. Millennium Partners LLC owns 2,253,863 shares 2. Millennium Development Partners L.P. owns 970,400 shares 3. MDP Ventures I LLC owns 80,600 shares 4. MDP Ventures II LLC owns 691,100 shares 5. Millennium Entertainment Partners L.P. owns 625,000 shares The address of all such entities is c/o Millennium Partners Management LLC, 1995 Broadway, New York, New York, 10023. (f) The "Number of Shares Beneficially Owned" is based on information contained in a report on Schedule 13G filed by Baron Capital Group, Inc. (and affiliates) with the SEC on March 4, 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 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 our 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. 28 45 Effective August 1996, Mr. Licklider entered into a consulting agreement with us pursuant to which Mr. Licklider received $10,000 per month, plus reimbursement for reasonable and necessary expenses. Effective with the commencement of the consulting agreement, Mr. Licklider resigned from the audit and compensation committees of the Board of Directors. Under the terms of the agreement, Mr. Licklider provided a minimum of 60 hours of service per month outside the normal scope of his duties as a director and advised us with respect to strategic and financial matters. By mutual consent, the agreement was not renewed upon its expiration on July 31, 1998. In April 1997, RM Sports Club, Inc., a company owned by Messrs. Talla and Licklider, entered into an agreement to purchase the Vertical Club in New York and in connection therewith made a $1.0 million non-refundable deposit. In April 1998, RM Sports Club, Inc. transferred its rights under the purchase agreement to us for a purchase price equal to $1.0 million. 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 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 January 1999, we entered into a non-binding letter of intent with Equity Advisory Group, pursuant to which we agreed to sell the property we own in Thousand Oaks, California for a purchase price of $12.0 million. Under the terms of the letter agreement, the sum of $10.0 million would be received at the close of the sale and the remaining $2.0 million would be paid upon the fulfillment of certain conditions by us. We would leaseback the property from Equity Advisory Group 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. It is anticipated that Mr. Licklider will beneficially own approximately a 10% interest in Equity Advisory Group and trusts for the benefit of Mr. Talla's minor children will beneficially own approximately a 12% interest in Equity Advisory Group. 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 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 is leasing these properties to us under a financing lease agreement. The lease has a term of twenty years, and provides for an annual rent of $1.0 million for the first ten years and $1.2 million per year thereafter. At any time during the first three years of the lease we may purchase the leased property for a price (currently estimated to be approximately $10.2 million at December 31, 1998) equal to $10.0 million and all costs incurred by Millennium in connection with the acquisition of such property, plus a 12% compound return on its total investment. Millennium has the right to require us to acquire its interest in the property at such price if (1) we receive private debt 29 46 financing in excess of $95.0 million, (2) we receive public equity financing in excess of $20.0 million, (3) a default (as defined in the lease) occurs or (4) a major casualty occurs with respect to either property. In June 1998, we acquired land from an unaffiliated third party in Houston, Texas, for approximately $3.1 million, on which we intend to build a Sports Club. Millennium agreed that, if we could not obtain satisfactory financing for this development, Millennium would acquire the land and negotiate with us to develop a Sports Club on the site. We were able to acquire the land without assistance from Millennium, and this Agreement has expired. We have entered into leases with Millennium relating to Sports Clubs to be developed in San Francisco and Washington D.C. and we are negotiating the terms of a lease for a Sports Club in 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 an amount equal to a management fee of 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 is expected to contain similar terms, except that the base rental payment is expected to be $2.75 million per year. We expect each of the Clubs to be approximately 100,000 square feet. 30 47 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. EXHIBIT NUMBER EXHIBIT - ------- ------- 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.++++ 9.1 Voting Agreement among D. Michael Talla, Nanette Pattee Francini, Mark S. Spino, Peter Feinstein, Philip J. Swain and FP II.* 10.1 1994 Stock Incentive Plan.*# 10.2 Form of Stock Option Agreement.*# 10.3 Form of Stock Purchase Agreement.*# 10.4 1994 Stock Compensation Plan.*# 10.5 Form of Indemnification Agreement between the Registrant and its directors and certain officers.* 10.6 Indemnification Agreement between the Registrant and D. Michael Talla.* 10.7 Indemnification Agreement between Registrant and Rex A. Licklider.* 10.8 Employment Agreement between Registrant and D. Michael Talla.*# 10.9 Employment Agreement between the Registrant and Nanette Pattee Francini.*# 10.10 Promissory Note executed by Agoura Hills/Spectrum Club dated March 29, 1994 in favor of Hawthorne Savings and Loan Association.* 31 48 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.11 Lease of premises for Reebok Sports Club/NY located at 160 Columbus Avenue, New York 10023 dated June 3, 1992.* 10.12 Joint Venture Agreement for Sports Connection - ES/MB between El Segundo-TDC, Ltd. and Continental El Segundo Corporation effective as of January 3, 1986.* 10.13 First Amendment to Joint Venture Agreement for Sports Connection - ES/MB dated January 3, 1986.* 10.14 Restated Agreement of Limited Partnership of El Segundo-TDC, Ltd., as amended.* 10.15 Management Agreement effective as of June 3, 1992, between R-SC/NY, Ltd. And Pontius Realty, Inc.* 10.16 License Agreement between Reebok Fitness Centers, Inc. and R-SC/NY, Ltd. Dated June 3, 1992.* 10.17 Letter Agreement regarding R-SC/NY dated June 3, 1992.* 10.18 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.* 10.19 Memorandum of Agreement between Reebok Fitness Centers, Inc. and the Company dated as of June 3, 1992.* 10.20 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.* 10.21 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.* 10.22 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.* 10.23 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.* 10.24 First Amended and Restated Agreement of Limited Partnership of Reebok-Sports Club/NY, Ltd. Dated as of October 12, 1994.* 10.25 Letter Agreement by and between Reebok Fitness Centers, Inc. and the Company dated October 12, 1994.* 10.26 Amendment to First Amended and Restated Agreement of Limited Partnership of Reebok-Sports Club/NY, Ltd. Dated as of October 12, 1994.* 10.27 Letter Agreement by and between Reebok Fitness Centers, Inc. and the Company, which became effective on October 29, 1994.* 32 49 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.28 License Agreement by and between Reebok Fitness Centers, Inc. and the Company, which became effective on October 20, 1994.* 10.29 Promissory Note executed by L.A./Irvine Sports Clubs, Ltd. In favor of MKDG/Rhodes SC Partnership, dated October 20, 1994.** 10.30 First Amendment to Employment Agreement between Registrant and John M. Gibbons, dated July 14, 1995.***# 10.31 Amended and Restated Employment Agreement between Registrant and John M. Gibbons, dated July 14, 1995.***# 10.32 401-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.**** 10.33 First Amendment to Restated Employment Agreement between Registrant and John M. Gibbons dated as of April 24, 1996.#**** 10.34 Management by and between Registrant and C.I.T.E. Design Corp. dated as of May 2, 1996.**** 10.35 Letter Agreement by and between Registrant and WPI.Koll Asia Pacific Advisors dated as of October 9, 1996.**** 10.36 Termination Agreement by and among Bally Total Fitness Holding Corporation, Bally Total Fitness Corporation, Bally's S.C. Management, Inc., The Sports Connection Holding Company and Registrant dated October 31, 1996.**** 10.37 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.**** 10.38 Letter Agreement between Millennium Entertainment Partners, L.P. and the Registrant dated as of March 13, 1997.**** 10.39 Loan Agreement entered into by and among the Registrant, The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine Sports Club, Inc., HealthFitness Organization of America, Inc., L.A./Irvine Sports Cub, Ltd., Talla New York, Inc., SCC Sports Club, Inc. and Sumitomo Bank of California dated as of March 20, 1997.**** 10.40 First Amendment to Option Agreement between D. Michael Talla and TTO Partners dated May 27, 1997.***** 10.41 Consulting Agreement between the Registrant and Rex A. Licklider dated August 1, 1997.#***** 10.42 First Amendment to Loan Agreement by and among the Registrant and various of its subsidiaries and Sumitiomo Bank of California dated August 1, 1997.***** 33 50 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.43 Second Amendment to Loan Agreement by and amoung the Registrant and various of its subsidiaries and Sumitomo Bank of California dated August 14, 1997.***** 10.44 Settlement Agreement, Agreement for Dismissal and General Release and Waiver by and between Century Entertainment, L.P., the Registrant and Century City Spectrum Club, Inc. dated May 16, 1997.***** 10.45 Modification to the March 13, 1997 letter between Millennium Entertainment Partners, L.P. and the Registrant dated June 10, 1997.***** 10.46 Asset Purchase Agreement between Green Valley Athletic Club Limited Partnership and the Registrant dated as of May 1, 1997.***** 10.47 Agreement of Purchase and Sale of Real Property between Green Valley Investment Company, Inc., and the Registrant dated as of May 1, 1997.***** 10.48 Agreement for Purchase and Sale of Assets by and among HFA Services, Inc., SportsTherapy, Inc. and Larry Schwartz made as of July 1, 1997.***** 10.49 Letter Agreement between Millennium Entertainment Partners, L.P. and the Registrant dated December 29, 1997.+ 10.50 Agreement of Purchase and Sale by and among The Spectrum Club Company, Inc., SCC I LLC and RBW/Fullerton dated as of December 31, 1997.+ 10.51 Agreement of Purchase and Sale between The Spectrum Club Company, Inc. and Norcan dated as of December 31, 1997.+ 10.52 Agreement of Purchase and Sale by and among The Spectrum Club Company, Inc., SCC I LLC, RBW/Santa Ana and RBWSA, LLC dated as of December 31, 1997.+ 10.53 Agreement of Purchase and Sale between The Spectrum Club Company, Inc. and Racquetball World dated as of December 31, 1997.+ 10.54 Agreement of Lease between SCC I LLC and the Registrant dated as of December 31, 1997.+ 10.55 Amended and Restated Loan Agreement by and among the Registrant and various of its subsidiaries and Sumitomo Bank of California dated as of February 2, 1998.***** 10.56 Amendment of Lease between Lincoln Metrocenter Partners, L.P. and Reebok-Sports Club/NY Ltd. As of January 31, 1998.***** 10.57 Letter Agreement between AT&T Commercial Finance Corporation and L.A./Irvine Sports Clubs, Ltd. Dated January 8, 1998.***** 10.58 Athletic Club Lease between Millennium Partners LLC and S.F. Sports Club, Inc. dated as of June 22, 1997.***** 10.59 Athletic Club Lease between Millennium Partners LLC and Washington D.C. Sports Club, Inc. dated as of June 22, 1997.***** 34 51 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.61 First Amendment to Amended and Restated Loan Agreement by and among the Registrant and various of its subsidiaries, Sumitomo Bank of California and Comerica Bank - California dated as of February 23, 1998.***** 10.62 Underwriting Agreement by and among the Registrant and Schroder & Co. Inc., Prudential Securities Incorporated and Sutro & Co. Incorporated dated April 1, 1998.++ 10.63 Form of Membership Agreements for The Sports Clubs and Spectrum Clubs. 10.64 Lease Agreement between RCPI Trust and the Registrant as of February 27, 1998. 10.65 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. 10.66 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. 10.67 Assignment and Assumption of Lease by and between Vertical Fitness and Racquet Club, Ltd., and Bally Entertainment Corporation dated January 8, 1996. 10.68 Assignment of Lease executed by Hilton Hotels Corporation, as successor to tenant, and agreed to and accepted by the Registrant, dated April 15, 1998. 10.69 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. 10.70 Letter Agreement among the Registrant and Rex A. Licklider and D. Michael Talla dated March 31, 1998. 10.71 Asset Purchase Agreement between Hilton Hotels Corporation and RM Sports Club, Inc. dated as of April 1, 1998. 10.72 Assignment and Assumption of Asset Purchase Agreement between RM Sports Club, Inc. and the Registrant entered into as of April 1, 1998. 10.73 Note Payable issued by the Registrant to Hilton Hotels Corporation dated April 15, 1998. 10.74 Instructions for Purchase of Real Estate in Houston, Texas dated March 5, 1998. 10.75 Amended and Restated 1994 Stock Incentive Plan as of June 2, 1998.# 10.76 Second Amendment to Amended and Restated Loan Agreement among the Registrant and certain of its subsidiaries, Sumitomo Bank of California and Comerica Bank - California dated as of March 16, 1998. 10.77 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. 10.78 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. 35 52 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.79 Third Amended and Restated Loan Agreement between the Registrant and certain of its subsidiaries and Comerica Bank - California dated as of February 1, 1999. 10.80 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. 10.81 Employment Agreement between the Registrant and John Gibbons dated October 16, 1998.# 10.82 Settlement Agreement and Mutual Release among the Registrant, RM Sports Club, Inc. and Bally Total Fitness Holding Corporation made as of December 31, 1998. 10.83 Letter Agreement between the Registrant and Millennium Partners LLC dated as of October 27, 1998. 10.84 Participation Agreement between the Registrant and Millennium Partners LLC, dated as of October 27, 1998. 10.85 First Amendment to Lease between RCPI Trust and the Registrant dated October 30, 1998. 10.86 Second Amendment to Lease between RCPI Trust and the Registrant dated March 4, 1999. 10.87 Lease between CB-1 Entertainment Partners LP and S.F. Sports Club, Inc. dated June 1, 1997. 10.88 Lease between 2200 M Street LLC and Washington D.C. Sports Club, Inc. dated March 1999. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. - ------------- # 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, filed with the Securities and Exchange Commission on March 31, 1995 (SEC file No. 1-13290). *** Incorporated by reference to the Registrant's Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 1996 (SEC file No. 1-13290). **** Incorporated by reference to the Registrant's Annual Report on Form 10-K/A, filed with the Securities and Exchange Commission on October 14, 1997 (SEC file No. 1-13290). ***** 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 Form 8-K, filed with the Securities and Exchange Commission on January 15, 1998 (SEC file No. 1-13290). 36 53 ++ Incorporated by reference to the Registrant's Regristration Statement on Form S-2, declared effective on April 1, 1998 (SEC file No. 333-46973). +++ 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). (b) Reports on Form 8-K The following reports on Form 8-K were filed from October 1, 1998 through the date of this report. DATE EVENT ---- ----- October 6, 1998 Announced adoption of Stockholder Rights Agreement. March 15, 1999 Announced amendment to Stockholder Rights Agreement and announced private offering of $100 million of senior secured notes. (c) Exhibits Index to Exhibits EXHIBIT NUMBER EXHIBIT - ------- ------- 10.63 Form of Membership Agreements for The Sports Clubs and Spectrum Clubs. 10.64 Lease Agreement between RCPI Trust and the Registrant as of February 27, 1998. 10.65 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. 10.66 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. 10.67 Assignment and Assumption of Lease by and between Vertical Fitness and Racquet Club, Ltd., and Bally Entertainment Corporation dated January 8, 1996. 10.68 Assignment of Lease executed by Hilton Hotels Corporation, as successor to tenant, and agreed to and accepted by the Registrant dated April 15, 1998. 10.69 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. 10.70 Letter Agreement among the Registrant and Rex A. Licklider and D. Michael Talla dated March 31, 1998. 10.71 Asset Purchase Agreement between Hilton Hotels Corporation and RM Sports Club, Inc. dated as of April 1, 1998. 37 54 EXHIBIT NUMBER EXHIBIT - ------- ------- 10.72 Assignment and Assumption of Asset Purchase Agreement between RM Sports Club, Inc. and the Registrant entered into as of April 1, 1998. 10.73 Note Payable issued by the Registrant to Hilton Hotels Corporation dated April 15, 1998. 10.74 Instructions for Purchase of Real Estate in Houston, Texas dated March 5, 1998. 10.75 Amended and Restated 1994 Stock Incentive Plan as of June 2, 1998.# 10.76 Second Amendment to Amended and Restated Loan Agreement among the Registrant and certain of its subsidiaries, Sumitomo Bank of California and Comerica Bank - California dated as of March 16, 1998. 10.77 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. 10.78 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. 10.79 Third Amended and Restated Loan Agreement between the Registrant and certain of its subsidiaries and Comerica Bank - California dated as of February 1, 1999. 10.80 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. 10.81 Employment Agreement between the Registrant and John Gibbons dated October 16, 1998.# 10.82 Settlement Agreement and Mutual Release among the Registrant, RM Sports Club, Inc. and Bally Total Fitness Holding Corporation made as of December 31, 1998. 10.83 Letter Agreement between the Registrant and Millennium Partners LLC dated as of October 27, 1998. 10.84 Participation Agreement between the Registrant and Millennium Partners LLC, dated as of October 27, 1998. 10.85 First Amendment to Lease between RCPI Trust and the Registrant dated October 30, 1998. 10.86 Second Amendment to Lease between RCPI Trust and the Registrant dated March 4, 1999. 10.87 Lease between CB-1 Entertainment Partners LP and S.F. Sports Club, Inc. dated June 1, 1997. 10.88 Lease between 2200 M Street LLC and Washington D.C. Sports Club, Inc. dated March 1999. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG LLP. - ------------ # Compensation agreement or plan. 38 55 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 25th day of March, 1999. THE SPORTS CLUB COMPANY, INC. /s/ D. Michael Talla ------------------------------------- D. Michael Talla, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant, in the capacities and on the date indicated.
Signature Title Date - ------------------------------------------------------------------------------------------------ /s/ D. Michael Talla Chairman of the Board March 25, 1999 - ----------------------------------- and Chief Executive Officer D. Michael Talla /s/ Timothy M. O'Brien Chief Financial Officer March 25, 1999 - ----------------------------------- (Principal Financial and Accounting Timothy M. O'Brien Officer) /s/ Rex Licklider Vice Chairman of the Board March 25, 1999 - ----------------------------------- Rex A. Licklider /s/ John M. Gibbons President, Chief Operating Officer March 25, 1999 - ----------------------------------- and Director John M. Gibbons /s/ Brian J. Collins Director March 25, 1999 - ----------------------------------- Brian J. Collins /s/ Nanette Pattee Francini Director March 25, 1999 - ----------------------------------- Nanette Pattee Francini Director - ----------------------------------- Andrew L. Turner /s/ Dennison Veru Director March 25, 1999 - ----------------------------------- Dennison Veru
39 EX-10.63 2 EXHIBIT 10.63 1 EXHIBIT 10.63 FORM OF MEMBERSHIP AGREEMENTS FOR SPORTS CLUBS AND SPECTRUM CLUBS I HAVE READ, UNDERSTAND AND RECEIVED A COMPLETE COPY OF THIS AGREEMENT, THE RELEASE, WAIVER OF LIABILITY AND INDEMNIFICATION AGREEMENT 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. Print Name:_______________________________________________________ Member's Signature_____________________________ Date:__________________________ Valencia Spectrum 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 cancelling this agreement, or words of similar effect. Such notice shall be sent to Valencia Spectrum, 24525 Town Center Drive, Valencia, CA 91355. - -------------------------------------------------------------------------------- 2 MEMBERSHIP VALID ONLY AT: [LOGO] CLUB __________________________ MEMBER SIGNATURE ______________ MEMBERSHIP AGREEMENT This Membership Agreement ("Agreement") for the type of membership indicated below, is between The Spectrum Club ("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. 1. INITIATION FEE AND DUES. In consideration of your membership, you are paying a non-refundable, non-transferable, one time initiation fee of $_______ and a $_______ non-refundable annual towel fee. Your monthly dues will be $_______ subject to increase as described in Section 6. You agree to pay dues, in advance, for the first full calendar month of your membership. Your membership and your dues payments will begin when this Agreement is signed by the Club and will continue unless otherwise terminated in accordance with Sections 6, 7, and 11. You have _____ have not _____ elected to prepay one year's dues in the amount of $_______ per month times 12 months less a 1 month discount of $_______ equals $_______. At the beginning of each new year of your membership, a non-refundable towel fee will be added to the monthly dues payment collected through Checkfree or to the annual renewal dues. 2. 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 operations. 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 operations. 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. 3. 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, ages 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 Add On 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 one time per year by providing 30 days advance written notice and upon payment of a transfer fee of $________. 4. TYPE OF MEMBERSHIP. Your membership type is: ___________________________ Health __________________________ Racquet _______________ All Spectrum Clubs _____________________ Home Club Only Racquet members are entitled to use and enjoy the facilities of the Club. Health members are entitled to use and enjoy the facilities of the Club except the racquet facilities. All Spectrum Clubs members are entitled to use and enjoy the facilities of existing Spectrum Clubs subject to the restrictions detailed in the above paragraph. Home Club Only members are entitled to use and enjoy the facilities only of the Club at which their membership was purchased ("Home Club") subject to the restrictions detailed in the above paragraph. 5. INITIATION FEES. Except as otherwise provided in this Agreement, your initiation fee is non-refundable. Your initiation fee is not a prepaid sum for services; it merely entitles you to buy services by paying dues and other applicable changes. 6. DUES AND OTHER CHARGES. Your dues, unless prepaid, must be paid through Checkfree electronic funds transfer program each month of your membership on the date designated by the Club. 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. If you have prepaid your dues, and if you choose to prepay again at the end of a prepaid term of membership, your new prepaid amount will reflect a discount equivalent to one month of your dues. The Club reserves the absolute right to increase your dues and towel fee after the first 12 months of your membership. 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 reserves the right to require monthly dues members with recurring bank or credit card returns to prepay annual membership dues as a condition of retaining Club membership. 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. 7. CANCELLATION. In the first 12 months of your membership, you can cancel your membership by giving 30 days advance written notification to the Club, paying a cancellation fee of $_______, 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. After the first 12 months of your membership, all the above conditions will apply except that no cancellation fee is required by the Club. If your membership is cancelled and at a later date you elect to rejoin the Club, you will be required to pay the then current initiation fee and dues rate for your class and type of membership. 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. Any discount given for prepayment of dues will be treated as a forgiveness of the dues for the last month of the period for which you prepaid dues. 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 this 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. 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. 8. TRANSFERABILITY. Except as provided in the case of Corporate memberships, your membership is non-transferable, non-assignable and non-voting. 2 3 9. RELEASE, WAIVER OF LIABILITY AND INDEMNIFICATION AGREEMENT. You, on behalf of yourself and any dependents, represent and agree as follows: (a) that you understand that 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 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, saunas, 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, demands, 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 of 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 ______. 10. LOSS OR THEFT OR MEMBER PROPERTY. The Club is not responsible for 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: ______. 11. DEATH OR DISABILITY. If you die or are disabled, and are therefore unable to receive all membership services to which you have agreed, you and your estate will be relieved from the obligation of making payment for membership services other than those received prior to death or the onset of disability. If you have prepaid membership dues, any dues allocable to membership services you have not received shall be refunded to you or your representative subject to the provisions of Section 7. 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. 12. 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 of 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 your 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 Spectrum 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 physician exercise. Leaves of absence will not be granted on a retroactive basis. 13. 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. 14. TIME OF ESSENCE. Time is of the essence of each provision of this Agreement. 15. 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. 16. 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. 17. STEROIDS 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. 18. 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 this 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: _______. 19. TEN DAY RIGHT TO CANCEL. You the buyer, may cancel this agreement at any time prior to midnight on the tenth business day after the Club has opened for member usage. Presale 1/97 4 [LOGO] MEMBERSHIP AGREEMENT I HAVE READ, UNDERSTAND AND RECEIVED A COMPLETE COPY OF THIS AGREEMENT, THE RELEASE, WAIVER OF LIABILITY AND INDEMNIFICATION AGREEMENT 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. Print Name:_______________________________________________________ Member's Signature_____________________________ Date:__________________________ 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 cancelling this agreement, or words of similar effect. Such notice shall be sent to The Sports Club/LA, 1835 Sepulveda Blvd., Los Angeles, CA 90025. - -------------------------------------------------------------------------------- 5 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. 1. INITIATION FEE AND DUES. In consideration of your membership, you are paying a non-refundable, non-transferable, one time initiation fee of $ _____. Your monthly dues will be $ _______ subject to increase as described in Section 7. You agree to pay dues, in advance, for the first and last full calendar months of your membership. Your membership and your dues payments will begin when this Agreement is signed by the Club, and will continue unless otherwise terminated in accordance with Sections 7, 8, and 12. You have ___ have not ___ elected to prepay one year's dues in the amount of $ ________ per month times 12 months less a 1 month discount of $ _________ equals $ __________. 2. 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. 3. 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 one time per year by providing 30 days advance written notice and upon payment of a transfer fee of $______. 4. TYPE OF MEMBERSHIP. Your membership type is: ___________________ Executive _____________________ Racquet _____________________ Health
Executive members are entitled to use and enjoy the facilities and perquisites of the Club as announced from time to time by the Club. Racquet members are entitled to use and enjoy the facilities of the Club except the Executive perquisites. Health members are entitled to use and enjoy the facilities of the Club except the Executive perquisites and the racquet facilities. 5. USE OF OTHER SPORTS CLUBS. Use of other affiliates of Club, existing or future, may be restricted or subject to additional fees. 6. INITIATION FEES. Except as otherwise provided in the applicable schedule attached to this Agreement, your initiation fee is non-refundable. The initiation fee is earned by the Club on the date of this Agreement and every thirty days thereafter at the rate of $1000 minus one month dues. If you elect to pay your initiation fees over time, it must be paid through credit card charges or other acceptable method of payment on the 30th day following the date that the Agreement is signed by the Club and, as applicable, each 30 days thereafter. Your initiation fee will not be prorated. Your initiation fee is not a prepaid sum for services; it merely entitles you to buy services by paying dues and other applicable charges. 7. DUES AND OTHER CHARGES. Your dues, unless prepaid, 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. If you have prepaid your dues, and if you choose to prepay again at the end of a prepaid term of membership, your new prepaid amount will reflect a discount equivalent to one month of your dues. 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 reserves the right to require monthly dues members with recurring bank or credit card returns to prepay annual membership dues as a condition of retaining Club membership. 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 RELEASE, WAIVER OF LIABILITY AND INDEMNIFICATION AGREEMENT 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. Print Name:_______________________________________________________ Member's Signature_____________________________ Date:__________________________ 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 cancelling this agreement, or words of similar effect. Such notice shall be sent to The Sports Club/LA, 1835 Sepulveda Blvd., Los Angeles, CA 90025. - -------------------------------------------------------------------------------- 6 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 then current initiation fee and dues rate for your class and type of membership. 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. Any discount given for prepayment of dues will be treated as a forgiveness of the dues for the last month of the period for which you prepaid dues. 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 this 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. 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 AND INDEMNIFICATION AGREEMENT. You, on behalf of yourself and any dependents, represent and agree as follows: (a) that you understand that 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 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, saunas, 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, demands, 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 of 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 for 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 you die or are disabled, and are therefore unable to receive all membership services to which you have agreed, you and your estate will be relieved from the obligation of making payment for membership services other than those received prior to death or the onset of disability. If you have prepaid membership dues, any dues allocable to membership services you have not received shall be refunded to you or your representative subject to the provisions of Section 8. 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 of 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 your 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. -6- 7 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 this 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 the Club facilities. Initial: ______. 10/96 -7- EX-10.64 3 EXHIBIT 10.64 1 EXHIBIT 10.64 ROCKEFELLER CENTER LEASE FEBRUARY 27, 1998 2 ================================================================================ RCPI TRUST, Landlord and THE SPORTS CLUB COMPANY, INC., Tenant -------------------------------------- LEASE -------------------------------------- A portion of the 1st, 2nd, 3rd and 4th Floors 630 Fifth Avenue Rockefeller Center New York, New York DATED: February 27, 1998 ================================================================================ 3 TABLE OF CONTENTS ARTICLE 1 BASIC LEASE PROVISIONS..............................................1 ARTICLE 2 PREMISES; TERM; RENT................................................4 ARTICLE 3 USE AND OCCUPANCY...................................................5 ARTICLE 4 CONDITION OF THE PREMISES...........................................9 ARTICLE 5 ALTERATIONS........................................................11 ARTICLE 6 FLOOR LOAD.........................................................15 ARTICLE 7 REPAIRS............................................................15 ARTICLE 8 INCREASES IN REAL ESTATE TAXES AND OPERATING EXPENSES.................................................17 ARTICLE 9 REQUIREMENTS OF LAW................................................25 ARTICLE 10 QUIET ENJOYMENT....................................................28 ARTICLE 11 SUBORDINATION......................................................28 ARTICLE 12 SERVICES...........................................................30 ARTICLE 13 INSURANCE, PROPERTY LOSS OR DAMAGE; REIMBURSEMENT......................................................34 ARTICLE 14 DESTRUCTION - FIRE OR OTHER CAUSE..................................37 ARTICLE 15 EMINENT DOMAIN.....................................................40 ARTICLE 16 ASSIGNMENT AND SUBLETTING..........................................42 ARTICLE 17 ELECTRICITY........................................................51 ARTICLE 18 ACCESS TO PREMISES.................................................53 ARTICLE 19 DEFAULT............................................................54 ARTICLE 20 REMEDIES AND DAMAGES...............................................57 ARTICLE 21 LANDLORD'S RIGHT TO CURE; REIMBURSEMENT............................59 ARTICLE 22 NO REPRESENTATIONS BY LANDLORD; LANDLORD'S APPROVAL...........................................................60 ARTICLE 23 END OF TERM........................................................61 ARTICLE 24 NO SURRENDER; NO WAIVER............................................62 ARTICLE 25 WAIVER OF TRIAL BY JURY............................................63 ARTICLE 26 ADJACENT EXCAVATION; SHORING.......................................63 ARTICLE 27 NOTICES............................................................63 ARTICLE 28 RULES AND REGULATIONS..............................................64 ARTICLE 29 PARTNERSHIP TENANT.................................................65 ARTICLE 30 VAULT SPACE........................................................66 ARTICLE 31 LANDLORD'S AGENT...................................................67 ARTICLE 32 INDEMNITY..........................................................67 ARTICLE 33 TAX STATUS OF BENEFICIAL OWNERS....................................69 ARTICLE 34 SECURITY DEPOSIT...................................................69 ARTICLE 35 MISCELLANEOUS......................................................72 ARTICLE 36 USE OF PREMISES....................................................75 ARTICLE 37 RENEWAL OPTIONS....................................................81 ARTICLE 38 SPECIAL PROVISION..................................................83 ARTICLE 39 RGTS AREA..........................................................84
-i- 4 EXHIBITS: A - FLOOR PLANS B - DEFINITIONS C - DIAGRAM OF THE PROTECTED ZONE D - TENANT'S WORK: RETAIL TENANT ALTERATION REQUIREMENTS E - RULES AND REGULATIONS F - [Intentionally Deleted] G - [Intentionally Deleted] H - [Intentionally Deleted] I - FORM OF LETTER OF CREDIT J - FORM OF LICENSE AGREEMENT K - EXHAUST AND DUCT PLAN -ii- 5 LEASE THIS LEASE is made as of the ____ day of February, 1998 between RCPI TRUST, a Delaware business trust having an office c/o Tishman Speyer Properties, L.P., 45 Rockefeller Plaza, New York, New York 10111 ("Landlord"), and THE SPORTS CLUB COMPANY, INC., a Delaware corporation having an office at 11100 Santa Monica Boulevard, Suite 300, West Los Angeles, California 90025 ("Tenant"). Landlord and Tenant hereby covenant and agree as follows: ARTICLE 1 BASIC LEASE PROVISIONS PREMISES Portions of the first (1st), second (2nd), third (3rd) and fourth (4th) floors of the Building, substantially as shown on Exhibit A, containing in the aggregate, 88,927 rentable square feet. The Premises include (i) 1,344 rentable square feet located on the first floor of the Building (the "First Floor Premises"), as shown on Exhibit A-1; (ii) 16,087 rentable square feet located on the second floor of the Building (the "Second Floor A Premises"), as shown on Exhibit A-2; (iii) 2,794 rentable square feet located on the second floor of the Building (the "Second Floor B Premises"), as shown on Exhibit A-3; (iv) 10,867 rentable square feet located on the second floor of the Building (the "Second Floor C Premises"), as shown on Exhibit A-4; (v) 52,886 rentable square feet located on the third floor of the Building (the "Third Floor Premises"), as shown on Exhibit A-5; and (vi) 4,949 rentable square feet located on the fourth floor of the Building (the "Fourth Floor Premises"), as shown on Exhibit A-6. BUILDING The building, fixtures, equipment and other improvements and appurtenances now located or hereafter erected, located or placed upon the land known as 630 Fifth Avenue, New York, New York. COMMENCEMENT DATE The date of execution and delivery of this Lease by Landlord and Tenant. RENT COMMENCEMENT For and with respect to each of the First Floor Premises, DATE(S) the Second Floor A Premises, the Second Floor B Premises, the Second Floor C Premises, the Third Floor Premises and the Fourth Floor Premises, the date which is 9 calendar months after the date on which Landlord delivers possession of the applicable Portion of the Premises to Tenant in accordance with the provisions of this Lease. EXPIRATION DATE The last day of the calendar month in which the day preceding the 15th anniversary of the Commencement Date occurs, or if the term of this Lease shall be extended in accordance with the -1- 6 provisions of Section 37 of this Lease, the last day of any renewal or extended term. TERM The period commencing on the Commencement Date and ending on the Expiration Date. PERMITTED USES Provide health club services and/or sports club services to the public, in a manner and fashion not materially different from those provided on the date of this Lease by the facility known as "The Reebok Sports Club" located at 160 Columbus Avenue, New York, New York, but never less than such other services as may be added to the foregoing facility from time-to-time during the Term (excepting only as permitted pursuant to the provisions of Section 36.2(k) of this Lease), and subject to the terms and provisions of this Lease, including Article 36 hereof and for no other purpose or purposes. -2- 7 BASE TAX YEAR The Tax Year commencing on July 1, 1997 and ending on June 30, 1998. BASE OPERATING The Computation Year commencing on January 1, 1997 and YEAR ending on December 31, 1997. TENANT'S AREA The aggregate number of rentable square feet contained in the Portion(s) of the Premises delivered to Tenant from time to time. FIXED RENT For each portion of the Premises as follows: (i) at the rate computed on the basis of $40.00 per rentable square foot per annum, in equal monthly installments, for the period commencing on the applicable Rent Commencement Date and ending on the last day immediately preceding the 5th anniversary of the Commencement Date, both dates being inclusive, and proportionately at such rate for any partial month during said period; (ii) at the rate computed on the basis of $44.80 per rentable square foot per annum, in equal monthly installments, for the period commencing on the 5th anniversary of the Commencement Date and ending on the last day immediately preceding the 10th anniversary of the Commencement Date, both dates being inclusive, and proportionately at such rate for any partial month during said period; and (iii) at the rate computed on the basis of $50.18 per rentable square foot per annum, in equal monthly installments, for the period commencing on the 10th anniversary of the Commencement Date and ending on the Expiration Date, both dates being inclusive, and proportionately at such rate for any partial month during said period. ADDITIONAL RENT All sums other than Fixed Rent payable by Tenant to Landlord under this Lease, including Tenant's Tax Payment and Tenant's Operating Payment (as required pursuant to Article 8), late charges, overtime or excess service charges, and interest and other costs related to Tenant's failure to perform any of its obligations under this Lease. RENT Fixed Rent and Additional Rent, collectively. SECURITY DEPOSIT $4,000,000.00, subject to the provisions of Article 34. LANDLORD'S AGENT Tishman Speyer Properties, L.P., or any other Person designated by Landlord from time to time as Landlord's Agent. TENANT'S AGENT Colliers ABR, Inc. LANDLORD'S $37.00 per rentable square foot of floor area in the CONTRIBUTION Premises. All capitalized terms used in the text of this Lease which are not otherwise defined herein, shall have the meanings ascribed to them in this Article 1 or in Exhibit B. -3- 8 ARTICLE 2 PREMISES; TERM; RENT Section 2.1 LEASE OF PREMISES. Subject to the terms of this Lease, Landlord leases the Premises to Tenant, and Tenant leases the Premises from Landlord, for the Term, excepting and reserving to Landlord the exterior walls of the Building and further reserving to Landlord the right to place above the dropped ceiling and/or below the floor in the Premises (in such manner as to reduce to a minimum the interference with Tenant's use of the Premises) utility lines, pipes, conduits, exhausts, and the like, to serve premises other than the Premises, and to replace and maintain and repair such utility lines, pipes, conduits, exhausts (including the kitchen exhausts and ducts depicted in the exhaust and duct plan attached hereto as Exhibit K), and the like in, over and upon the Premises as may have been or may be installed by Landlord in the Building. As used herein, the phrase "Portion(s) of the Premises" means the First Floor Premises, the Second Floor A Premises, the Second Floor B Premises, the Second Floor C Premises, the Third Floor Premises and/or the Fourth Floor Premises, individually and collectively. Section 2.2 PAYMENT OF RENT. Tenant shall pay to Landlord, without notice or demand, and without any set-off, counterclaim, abatement or deduction whatsoever, except as may be expressly set forth in this Lease, in lawful money of the United States, by wire transfer of funds to Landlord's account, as designated by Landlord, or -4- 9 by check drawn upon a bank approved by Landlord, at Landlord's office at 45 Rockefeller Plaza, New York, New York 10111, or such other place as Landlord shall from time to time designate in writing: (i) Fixed Rent in equal monthly installments, in advance, on the first day of each calendar month during the Term, commencing on the applicable Rent Commencement Date, and (ii) Additional Rent, at the times and in the manner set forth in this Lease. Section 2.3 FIRST MONTH'S RENT. Tenant shall pay an amount equal to $266,213.33 upon the execution and delivery of this Lease (the "Initial Payment"). If the Rent Commencement Date for any portion of the Premises is on the first day of a calendar month, then such payment shall be credited towards such month's Fixed Rent payment; provided, however if pursuant to the provisions of this Lease (including Section 3.2 hereof) the amount due on account of Fixed Rent for said month is less than the Initial Payment, then the excess, if any, will be credited toward the Fixed Rent payment due for the next succeeding calendar month. If the Rent Commencement Date for any portion of the Premises is not the first day of a calendar month, then, on the applicable Rent Commencement Date Tenant shall pay the proportionate amount of the Fixed Rent which is payable for the period from the applicable Rent Commencement Date through the last day of such month, and the Initial Payment shall be credited towards the Fixed Rent which is payable for the next succeeding calendar month; provided, however if pursuant to the provisions of this Lease (including Section 3.2 hereof) the amount due on account of Fixed Rent for said month is less than the Initial Payment, then the excess, if any, will be credited toward the Fixed Rent payment due for the next succeeding calendar month. Section 2.4 INTEREST. If Tenant shall fail to pay any installment or other payment of Rent when due, interest shall accrue on such installment or payment as a late charge, from the date such installment or payment became due until the date paid, at the Interest Rate. ARTICLE 3 USE AND OCCUPANCY Section 3.1 (a) PERMITTED USES. Tenant shall use and occupy the Premises for the Permitted Uses and for no other purpose or purposes. Tenant shall not use or occupy or suffer the use or occupancy of any part of the Premises in a manner constituting a Prohibited Use. If Tenant uses or suffers the use of the Premises for a purpose which constitutes a Prohibited Use or violates any Requirement, or which causes the Building to be in violation of any Requirement, then Tenant shall promptly discontinue such use upon notice of such violation. (b) LICENSES AND PERMITS. Tenant, at its expense, shall obtain and at all times maintain and comply with the terms and conditions of all licenses and permits required for the lawful conduct of the Permitted Uses in the Premises. Section 3.2 (a) DELIVERY OF PREMISES. Landlord shall be deemed to have delivered possession of any Portion(s) of the Premises to Tenant upon the giving of notice by Landlord to Tenant stating that the applicable Portion of the Premises is vacant, in the condition required under this Lease, and available for Tenant's occupancy. Subject to the provisions of this Lease, Landlord agrees to deliver each Portion of the Premises to Tenant promptly after the same are vacated by the former tenant(s) or occupant(s). At all times prior to the delivery of any Portion of the Premises, said Portion of the Premises shall not be considered to be a part of the Premises and Tenant shall have no rights or obligations with respect thereto, including the right to enter said Portion of the Premises. Upon delivery of any Portion of the Premises, said Portion of the Premises shall automatically be and become a part of the "Premises" for all purposes under this Lease and the number of rentable square feet contained in said Portion of the Premises shall be added to and become a part of the "Tenant's Area." Without limiting the foregoing, upon request by Landlord or Tenant, from time-to-time, the parties will execute a written instrument or instruments setting forth the Portions of the Premises delivered to Tenant as of said date and the Fixed Rent payable in connection therewith. The failure of either party to execute and deliver said instrument shall not affect the rights, obligations or interests of the parties. Landlord shall not be liable for the failure of former tenants or occupants to vacate any Portion of the Premises, or its failure to deliver possession -5- 10 of the applicable Portion of the Premises to Tenant on any specified date, and subject only to the provisions of the next succeeding paragraph, any such failure shall not impair the validity of this Lease or the effectiveness thereof with respect to those Portions of the Premises which are delivered to Tenant. Tenant acknowledges that the Second Floor B Premises, the Second Floor C Premises, the Third Floor Premises, and the Fourth Floor Premises, are leased to or occupied by other tenants or occupants and that the terms of the existing lease agreements with respect to the Second Floor B Premises, the Second Floor C Premises and the Fourth Floor Premises presently expire on September 30, 2009, June 27, 1999 and April 30, 2000, respectively. (b) DELIVERY OF FIRST FLOOR PREMISES, SECOND FLOOR A PREMISES AND THIRD FLOOR PREMISES. Landlord shall deliver the First Floor Premises, the Second Floor A Premises and the Third Floor Premises concurrently. Landlord will exercise commercially reasonable efforts to deliver each of the First Floor Premises, the Second Floor A Premises and the Third Floor Premises by not later than January 1, 1999, subject, however to Unavoidable Delays, in which event Landlord will exercise commercially reasonable efforts to deliver each of the First Floor Premises, the Second Floor A Premises, and the Third Floor Premises by not later than August 1, 1999 (the "Outside Delivery Date"). If Landlord delivers each of the First Floor Premises, the Second Floor A Premises and the Third Floor Premises prior to the termination of this Lease by Landlord or Tenant pursuant to and in accordance with the provisions of this Section 3.2(b), then notwithstanding Landlord's failure to deliver any other Portions of the Premises, this Lease shall remain in full force and effect with respect to those Portions of the Premises which are delivered to Tenant. If notwithstanding Landlord's reasonable efforts Landlord has not delivered each of the First Floor Premises, the Second Floor A Premises and the Third Floor Premises by the Outside Delivery Date, then at any time thereafter prior to delivery of said Portions of the Premises, either Landlord or Tenant may elect, at their respective options, by providing notice thereof to the other, to terminate this Lease, and this Lease shall terminate on the 45th day after the giving of such notice, unless within said 45 day period Landlord delivers the previously undelivered Portion (or Portions) of the Premises to Tenant. If this Lease is terminated as aforesaid, then Tenant shall surrender, in accordance with the requirements of this Lease, possession of all Portions of the Premises previously delivered to it, this Lease shall be of no further force and effect after the date of termination, and neither party shall have any further obligations to the other in connection with this Lease, subject, however to the payment by Tenant to Landlord of all sums then due and owing or having accrued to Landlord hereunder. Notwithstanding the foregoing, if Landlord in its good faith discretion determines that notwithstanding its reasonable efforts Landlord will be unable to deliver each of the First Floor Premises, the Second Floor A Premises and the Third Floor Premises prior to the Outside Delivery Date, then at any time after Landlord makes such determination and prior to delivery of said Portions of the Premises, Landlord may elect, at its option, by providing notice thereof to Tenant, to terminate this Lease. If this Lease is terminated as aforesaid, then Tenant shall surrender, in accordance with the requirements of this Lease, possession of all Portions of the Premises previously delivered to it, this Lease shall be of no further force and effect after the date of termination, and neither party shall have any further obligations to the other in connection with this Lease, subject, however to the payment by Tenant to Landlord of all sums then due and owing or having accrued to Landlord hereunder. (c) DELIVERY OF SECOND FLOOR B PREMISES, SECOND FLOOR C PREMISES AND FOURTH FLOOR PREMISES. Landlord shall not deliver the Second Floor C Premises unless the Second Floor B Premises are delivered concurrently therewith. Landlord will exercise commercially reasonable efforts to deliver each of the Second Floor B Premises, the Second Floor C Premises, and the Fourth Floor Premises as soon as practicable after the date of this Lease. If notwithstanding Landlord's reasonable efforts Landlord has not delivered the Second Floor B Premises by January 1, 2001, then at any time thereafter prior to delivery of said Portions of the Premises, Landlord may elect, at its option, by providing notice thereof to Tenant, to terminate this Lease with respect to the Second Floor B Premises and the Second Floor C Premises, in which event the Second Floor B Premises and the Second Floor C Premises shall be removed from the Premises, and this Lease shall remain in full force and effect with respect to all other Portions of the Premises previously delivered to Tenant. If the Second Floor B Premises and the Second Floor C Premises are removed from the Premises as aforesaid, then Tenant shall have no further rights -6- 11 or obligations with respect thereto, and Landlord will be free to lease and deal with the Second Floor B Premises and the Second Floor C Premises free of any rights or claims of any Tenant Party. Notwithstanding the foregoing, if Landlord in its good faith discretion determines that notwithstanding its reasonable efforts Landlord will be unable to deliver each of the Second Floor B Premises and the Second Floor C Premises prior to January 1, 2001, then at any time after Landlord makes such determination and prior to delivery of said Portions of the Premises, Landlord may elect, at its option, by providing notice thereof to Tenant, to terminate this Lease with respect to the Second Floor B Premises and the Second Floor C Premises, in which event the Second Floor B Premises and the Second Floor C Premises shall be removed from the Premises, and this Lease shall remain in full force and effect with respect to all other Portions of the Premises previously delivered to Tenant. If the Second Floor B Premises and the Second Floor C Premises are removed from the Premises as aforesaid, then Tenant shall have no further rights or obligations with respect thereto, and Landlord will be free to lease and deal with the Second Floor B Premises and the Second Floor C Premises free of any rights or claims of any Tenant Party. The provisions of this Article are intended to constitute "an express provision to the contrary" within the meaning of Section 223-a of the New York Real Property Law or any successor Requirement. Section 3.3 USE OF BUILDING NAME. Concurrently herewith, Tenant has entered into a sublicense agreement (the "Sublicense Agreement") in the form attached hereto as Exhibit J, pursuant to which Tenant may use the trade name "Sports Club Rockefeller Center" in connection with the business to be conducted by Tenant in the Premises. Except as expressly and specifically permitted pursuant to the provisions of the Sublicense Agreement, no Tenant Party shall use the words "Rockefeller Center", "Radio City" or "Radio City Music Hall" or any combination or simulation thereof, or any logo or image of Rockefeller Center, or the image of any prominent part of Rockefeller Center, for any purpose whatsoever, including as or for any corporate, firm or trade name, trademark or designation or description of merchandise or services; provided, however, that the foregoing shall not prevent the use by Tenant or other permitted occupant of the Premises, in a conventional manner and without emphasis or display, of the words "Rockefeller Center" and/or, where applicable, "Rockefeller Plaza," as part of Tenant's or such permitted occupant's business address or for reference purposes in the ordinary course of its business. Landlord agrees that if Tenant assigns this Lease in accordance with the provisions of Article 16 of this Lease, then upon Tenant's request, Landlord will enter into a sublicense agreement substantially in the form of the Sublicense Agreement with said assignee. Landlord agrees that if Tenant enters into a sublease for all or a portion of the Premises in accordance with the provisions of Article 16 of this Lease, then upon Tenant's request, subject to Landlord's prior approval of the proposed use of the Rockefeller Center Mark (as defined in the Sublicense Agreement) by the subtenant, Landlord will enter into a sublicense agreement substantially in the form of the Sublicense Agreement with said subtenant. Neither Tenant nor any occupant of the Premises shall use the name of the Building or the name of the entity for which the Building is named or designated by Landlord or any part or abbreviation (including initials) of any such name, except in a conventional manner, and without emphasis or display, as a part of Tenant's or such permitted occupant's business address. Section 3.4 BROADCAST RESTRICTIONS. Neither Tenant nor any Tenant Party shall (i) conduct or permit to be conducted any Broadcast activities or video production activities from any area of the Center, (ii) install or display any signs, symbols or logos within the Center which are commonly identified with any Broadcast or cable network or any Broadcast or video production activities or (iii) use or permit the use of Protected Zone Images in any Broadcast. "Broadcast" means the transmission of video programming, including news footage clips, by any means, including over-the air television broadcasting, cable television distribution and the like, and including successor distribution technologies which are comparable to the foregoing (but "Broadcast" shall not be deemed to include teleconferencing, private video telephone communications or other similar means of video transmission which are not intended for public distribution). "Protected Zone Images" means visual images of all or any part of the area consisting of the Plaza, the Plaza Street, the Channel Gardens, the Center skating rink and areas adjacent thereto, as shown on the diagram of the Protected Zone attached as Exhibit C to this Lease. -7- 12 Section 3.5 EXCLUSIVE. Provided that Tenant operates its business in the Premises in accordance with all of the terms, provisions and conditions of this Lease, and provided that this Lease is in full force and effect, Landlord agrees (insofar as, to the extent and for such period of time as applicable law shall permit the same) that during the Term Landlord will not enter into any lease for any other premises in the Center which permits the use of said premises during the Term principally or primarily as a fitness/health club facility which is open to the general public or with respect to which memberships are available to the general public; provided, however, that the foregoing shall not prevent or preclude Landlord from entering into leases which permit tenants to operate (i) health club facilities which are not open to the general public or with respect to which memberships are not available to the general public, (ii) health club and/or fitness facilities which are incidental or accessory to a principal or primary use, or (iii) spa, salon or sports medicine facilities which may or may not be open to the general public, or with respect to which memberships may or may not be available to the general public. In no event shall Tenant, by reason of Landlord's breach of the foregoing covenant, have the right to terminate this Lease or to withhold payment of Rent or other charges due hereunder or to obtain monetary damages from Landlord. Tenant's sole remedy on account of a breach of the foregoing covenant shall be to seek injunctive relief against Landlord compelling Landlord to comply with the foregoing covenant. ARTICLE 4 CONDITION OF THE PREMISES Section 4.1 CONDITION; INITIAL CONSTRUCTION OF THE PREMISES. Tenant has inspected the Premises and agrees (i) to accept possession of each portion of the Premises in the "as is" condition existing on the date of delivery thereof to Tenant, (ii) that neither Landlord nor Landlord's agents have made any representations or warranties with respect to the Premises or the Building except as expressly set forth herein, and (iii) Landlord has no obligation to prepare the Premises for use and occupancy by Tenant or to perform any work, supply any materials, incur any expense (excepting only Landlord's Contribution), or make any alterations, additions, or improvements to the Premises to prepare the Premises for Tenant's use and occupancy. Tenant's occupancy of any part of the Premises shall be conclusive evidence, as against Tenant, that Tenant has accepted possession of the Premises in their then-current condition, and the Premises and the Building are in a good and satisfactory condition as required by this Lease. Promptly after delivery of possession of each Portion of the Premises to Tenant, Tenant shall, at its own cost and expense (excepting only Landlord's Contribution) perform or cause to be performed, any and all work necessary to prepare such portion of the Premises for Tenant's initial occupancy thereof, in accordance with and subject to the terms and provisions of this Lease, including Article 5. Such work to be performed by Tenant shall include any and all work required to cause the Premises (which shall include all means of access and egress to, from and between the floors comprising parts of the Premises) to comply with all conditions and Requirements imposed by Governmental Authorities in connection with the issuance of all permits, approvals and certificates (including certificates of occupancy) relating to the Premises; provided, that, in connection with the calculation of the availability of egress from the Premises if another tenant (other than Tenant) on any floor has access to any stairway, then said stairway may only be included in the foregoing calculation by Tenant to the extent not included by such other tenant(s) in their respective calculations. Section 4.2 LANDLORD'S CONTRIBUTION. (a) Landlord agrees to pay to Tenant, toward payment of the cost of the work to be performed by Tenant in connection with Tenant's initial occupancy of each Portion of the Premises (the "Initial Installations"), an amount not to exceed Landlord's Contribution for such Portion of the Premises, provided that as of the date on which Landlord is required to make each respective payment pursuant to Section 4.2(b): (i) this Lease is in full force and effect, and (ii) no Event of Default then exists. Tenant shall pay all costs of the Initial Installations in excess of Landlord's Contribution. Landlord's Contribution shall be payable solely on account of labor directly related to the Initial Installations and materials delivered to the Premises in connection with the Initial Installations, except that Tenant may apply up to 5% of Landlord's Contribution to pay "soft costs" incurred in connection with the Initial Installations, which shall be limited to the actual architectural, consulting and -8- 13 engineering fees incurred by Tenant in connection therewith. Tenant shall not be entitled to receive any portion of Landlord's Contribution not actually expended by Tenant in the performance of the Initial Installations in accordance with this Section 4.2, nor shall Tenant have any right to apply any unexpended portion of Landlord's Contribution as a credit against Rent or any other obligation of Tenant hereunder. Notwithstanding anything to the contrary contained in this Section 4.2, Tenant shall not be entitled to receive any portion of Landlord's Contribution payable with respect to any Portion of the Premises prior to delivery to Tenant of the applicable Portion of the Premises. (b) Landlord shall make progress payments of Landlord's Contribution to Tenant on a monthly basis, for the work performed during the previous month, less a retainage of 10% of each progress payment (the "Retainage"). Each of Landlord's progress payments will be limited to an amount equal to the aggregate amounts (reduced by the Retainage) theretofore paid by Tenant (as certified by the chief financial officer of Tenant and by Tenant's independent, licensed architect) to Tenant's contractors, subcontractors and material suppliers which have not been the subject of a previous disbursement from Landlord's Contribution for such Portion of the Premises, multiplied by a fraction, the numerator of which is the amount of Landlord's Contribution for such Portion of the Premises, and the denominator of which is the total contract price (or, if there is no specified or fixed contract price for the Initial Installations for such Portion of the Premises, then Landlord's reasonable estimate thereof) for the performance of all of the Initial Installations for such Portion of the Premises shown on all plans and specifications approved by Landlord, provided that in no event shall such fraction be greater than 1. Such progress payments shall be made no more than once each calendar month within 30 days next following the delivery to Landlord of requisitions therefor, signed by a financial officer of Tenant, which requisitions shall set forth the names of each contractor, subcontractor and material supplier to whom payment is due, and the amount thereof, and shall be accompanied by (1) with the exception of the first requisition, copies of partial waivers of lien from all contractors, subcontractors and material suppliers covering all work and materials which were the subject of previous progress payments by Landlord and Tenant, (2) a written certification from Tenant's architect that the work for which the requisition is being made has been completed in accordance with the plans and specifications approved by Landlord, and (3) such other documents and information as Landlord may reasonably request. Landlord shall disburse the Retainage upon submission by Tenant to Landlord of a requisition therefor, accompanied by all documentation required under clauses (1), (2) and (3) above, together with (A) proof of the satisfactory completion of all required inspections and issuance of any required approvals, permits and sign-offs for the Initial Installations by all Governmental Authorities having jurisdiction thereover, (B) final "as-built" plans and specifications for the Initial Installations, and (C) the issuance of final lien waivers by all contractors, subcontractors and material suppliers covering all of the Initial Installations. Notwithstanding anything to the contrary set forth in this Section 4.2, if Tenant fails to pay when due any sums due and payable to any of Tenant's contractors, subcontractors or material suppliers, Landlord shall have the right, but not the obligation, to pay to such contractor, subcontractor or supplier all sums so due from Tenant, and sums so paid by Landlord shall be deemed additional rent and shall be paid by Tenant within 10 Business Days after Landlord delivers to Tenant an invoice therefor. The right to receive Landlord's Contribution is for the exclusive benefit of Tenant, and in no event shall such right be assigned to or be enforceable by or for the benefit of any third party, including any contractor, subcontractor, materialman, laborer, architect, engineer, attorney or any other Person. ARTICLE 5 ALTERATIONS Section 5.1 TENANT'S ALTERATIONS. (a) Tenant shall not make any alterations, additions, improvements, or other physical changes in or about the Premises, including the Initial Installations (collectively, "Alterations"), other than decorative Alterations such as painting, wall coverings and floor coverings (collectively, "Decorative Alterations"), without obtaining in each instance, Landlord's prior consent, which consent may be withheld in Landlord's sole discretion. Notwithstanding the foregoing, Landlord will not unreasonably withhold its consent to proposed Alterations so long as such Alterations (i) are non-structural and do not affect the Building Systems, (ii) are performed only by Landlord's designated contractors or by contractors approved by Landlord to perform such Alterations, (iii) affect only -9- 14 the Premises and are not visible from outside of the Premises or the Building, (iv) do not affect the certificate of occupancy issued for the Building or the Premises, (v) are consistent with the design, construction and equipment of the Building and the Center, and (vi) do not adversely affect any service furnished by Landlord in connection with the operation of the Building or the Center. (b) PLANS AND SPECIFICATIONS. Prior to making any Alterations, Tenant, at its expense, shall (i) submit to Landlord for its approval, detailed plans and specifications (including layout, architectural, mechanical, electrical, plumbing, sprinkler and structural drawings) of each proposed Alteration, other than Decorative Alterations (said plans shall be delivered with a notice to Landlord expressly stating that Landlord should identify all Specialty Alterations (hereinafter defined) while reviewing said plans and specifications), and with respect to any Alteration affecting any Building System, Tenant shall submit proof that the Alteration has been designed by, or reviewed and approved by, Landlord's designated engineer for the affected Building System, (ii) obtain all permits, approvals and certificates required by any Governmental Authorities (including a PW-1 Form, approved by applicable Governmental Authorities, for amending the certificate of occupancy, and all public assembly permits, and physical culture establishment permits), (iii) furnish to Landlord duplicate original policies or certificates of workers compensation insurance (covering all persons to be employed by Tenant, and Tenant's contractors and subcontractors in connection with such Alteration), comprehensive public liability (including property damage coverage) and builder's risk insurance coverage (issued on a completed value basis) all in such form, with such companies, for such periods and in such amounts as Landlord may reasonably require, naming Landlord, the Indemnitees and any other parties designated by Landlord as additional insureds, and (iv) furnish to Landlord such other evidence of Tenant's ability to complete and to fully pay for such Alterations (other than Decorative Alterations) as is reasonably satisfactory to Landlord. Upon Tenant's request, Landlord shall exercise reasonable efforts to cooperate with Tenant in obtaining any permits, approvals or certificates required to be obtained by Tenant in connection with any permitted Alteration (if the provisions of the applicable Requirement require that Landlord join in such application), provided that Tenant shall reimburse Landlord for any cost, expense or liability incurred by Landlord in connection therewith. Tenant shall give Landlord not less than 5 Business Days' notice prior to performing any Decorative Alteration which is not consistent with, or of the same type, design and style as those installed as part of the Initial Installations, which notice shall contain a description of such Decorative Alteration. Without limitation, all Alterations (including Decorative Alterations) shall be of equal or better quality as those installed as part of the Initial Installations. (c) GOVERNMENTAL APPROVALS, PLANS. Upon completion of any Alterations, Tenant, at its expense, shall promptly obtain all certificates of final approval of such Alterations required by any Governmental Authority (including all certificates of occupancy, public assembly permits, and physical culture establishment permits), and shall furnish Landlord with copies thereof, together with "as-built" plans and specifications for such Alterations (other than Decorative Alterations) prepared on an Autocad Computer Assisted Drafting and Design System (or such other system or medium as Landlord may accept) using naming conventions issued by the American Institute of Architects in June, 1990 (or such other naming convention as Landlord may accept) and magnetic computer media of such record drawings and specifications, translated into DXF format or another format acceptable to Landlord. (d) LANDMARKS PRESERVATION. TENANT IS HEREBY NOTIFIED THAT THE PREMISES ARE SUBJECT TO THE JURISDICTION OF THE CITY OF NEW YORK LANDMARKS PRESERVATION COMMISSION. IN ACCORDANCE WITH SECTIONS 25-305, 25-306, 25-309 AND 25-310 OF THE ADMINISTRATIVE CODE OF THE CITY OF NEW YORK AND THE RULES SET FORTH IN TITLE 63 OF THE RULES OF THE CITY OF NEW YORK, ANY DEMOLITION, CONSTRUCTION, RECONSTRUCTION, ALTERATION OR MINOR WORK AS DESCRIBED IN SUCH SECTIONS AND SUCH RULES MAY NOT BE COMMENCED WITHIN OR AT THE PREMISES WITHOUT THE PRIOR WRITTEN APPROVAL OF THE LANDMARKS PRESERVATION COMMISSION. TENANT IS NOTIFIED THAT SUCH DEMOLITION, CONSTRUCTION, RECONSTRUCTION, ALTERATIONS OR MINOR WORK INCLUDES, BUT IS NOT LIMITED TO, (A) WORK TO THE EXTERIOR OF THE PREMISES INVOLVING WINDOWS, SIGNS, AWNINGS, FLAGPOLES, BANNERS AND STOREFRONT ALTERATIONS AND (B) INTERIOR WORK TO THE PREMISES THAT (I) REQUIRES A PERMIT FROM THE DEPARTMENT OF BUILDINGS OR (II) CHANGES, DESTROYS OR AFFECTS AN INTERIOR ARCHITECTURAL FEATURE OF AN INTERIOR LANDMARK OR AN EXTERIOR ARCHITECTURAL FEATURE OF AN IMPROVEMENT THAT IS A LANDMARK OR LOCATED ON A LANDMARK SITE OR IN A HISTORIC DISTRICT. -10- 15 Section 5.2 MANNER AND QUALITY OF ALTERATIONS. All Alterations shall be performed (i) in a good and first-class workmanlike manner and free from defects, (ii) in accordance with the plans and specifications as required under Section 5.1, and by contractors, approved by Landlord, (iii) excepting only for Decorative Alterations, under the supervision of a licensed architect reasonably satisfactory to Landlord, and (iv) in compliance with all Requirements, the terms of this Lease including the Tenant Design and Work Specifications attached hereto as Exhibit D and incorporated herein by this reference, all procedures and regulations then prescribed by Landlord for work performed in the Building, and the Rules and Regulations. All materials and equipment to be used in the Premises shall be of first quality and at least equal to the applicable standards for the Building then established by Landlord, and no such materials or equipment shall be subject to any lien or other encumbrance. Section 5.3 RESTORATION OF PREMISES; REMOVAL OF TENANT'S PROPERTY. All Building Standard Installations (as hereinafter defined) shall be and remain the property of Landlord, shall remain upon the Premises and shall not be removed by Tenant and at the expiration or termination of the Term shall be surrendered with the Premises as a part thereof without disturbance, molestation or injury. All Above Building Standard Installations (as hereinafter defined) and Tenant's Property shall be and, except as hereinafter provided, shall remain the property of Tenant. On or prior to the Expiration Date or sooner termination of the Term, Tenant shall, at Tenant's expense, remove all of Tenant's Property and, unless otherwise directed in writing by Landlord: (i) close up any slab penetrations, restore all structural steel and Building Systems previously removed by Tenant in the Premises and (ii) remove any kitchen facilities, raised floors, internal stairways, vaults, private lavatories, libraries, vertical transportation systems, reinforced floor areas, supplemental air-conditioning systems or other Alterations designated by Landlord for removal by Tenant (collectively, "Specialty Alterations") (all Specialty Alterations shall be deemed to be "Above Building Standard Installations" for all purposes of this Lease). Without limiting the foregoing, if together with the submission of plans and specifications, Tenant provides Landlord with a notice expressly stating that Landlord should identify all Specialty Alterations while reviewing said plans and specifications, then Landlord will designate which Alterations will constitute Specialty Alterations in connection with its approval of the plans and specifications. At least 30 days prior to commencing the removal of any Specialty Alterations or the closing of any slab penetrations, Tenant shall notify Landlord of its intention to remove such Specialty Alterations or effect such closings, and if Landlord notifies Tenant within such 30 day period, then Tenant shall not remove such Specialty Alterations or close such slab penetrations. All Specialty Alterations not so removed shall become the property of Landlord upon the Expiration Date or sooner termination of the Term. Tenant shall repair and restore, at its sole cost and expense, in a good and workmanlike manner, any damage to the Premises or the Building resulting from or caused by Tenant's removal of any Alterations or Tenant's Property, or by the closing of any slab penetrations, and if Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for Landlord's cost of repairing and restoring such damage. Any Above Building Standard Installations or Tenant's Property not removed on or before the Expiration Date or sooner termination of the Term shall be deemed abandoned and Landlord may either retain the same as Landlord's property or remove and dispose of same, and repair and restore any damage caused thereby, at Tenant's cost and without liability to or recourse by Tenant or anyone claiming by, through or under Tenant. Section 5.4 MECHANIC'S LIENS. Tenant, at its expense, shall discharge any lien or charge filed against the Premises and/or the Real Property, which liens or charges may arise out of or result from any work claimed or determined in good faith by Landlord to have been done by or on behalf of, or materials claimed or determined in good faith by Landlord to have been furnished to, Tenant, within not more than 20 days after Tenant's receipt of notice thereof, by payment, filing the bond required by law or otherwise in accordance with law. Section 5.5 LABOR RELATIONS. Tenant shall not employ, or permit the employment of, any contractor or laborer, or permit any materials to be delivered to or used in the Building, if, in Landlord's sole judgment, such employment, delivery or use will interfere or cause any conflict or disharmony with other contractors or laborers engaged in the construction, maintenance or operation of the Building or the Center by Landlord, Tenant or others, or the use and enjoyment of the Building or the Center by other tenants or occupants. In the event of such interference, conflict or disharmony, upon Landlord's request, -11- 16 Tenant shall cause all contractors or laborers causing such interference or conflict to leave the Building immediately. Section 5.6 TENANT'S COSTS. Tenant shall pay to Landlord or its designee, within 10 days after demand, all out-of-pocket costs actually incurred by Landlord in connection with Tenant's Alterations (including the Initial Installations), including costs incurred in connection with (i) Landlord's review of the Alterations (including review of requests for approval thereof), and (ii) the provision of Building personnel during the performance of any Alterations required by trade union policy or otherwise, to operate elevators or otherwise to facilitate Tenant's Alterations. Section 5.7 TENANT'S EQUIPMENT. Tenant shall not move any heavy machinery, heavy equipment, freight, bulky matter or fixtures into or out of the Building without Landlord's prior consent and payment to Landlord of Landlord's reasonable charges in connection therewith. If any such machinery, equipment or other items require special handling, Tenant agrees (i) to employ only persons holding a Master Rigger's License to perform such work, and (ii) such work shall be done only during hours designated by Landlord. Section 5.8 LEGAL COMPLIANCE. The approval of plans or specifications, or the consent by Landlord to the making of any Alterations, does not constitute Landlord's agreement or representation that such plans, specifications or Alterations comply with any Requirements or the certificate of occupancy issued for the Building. Landlord shall have no liability to Tenant or any other party in connection with Landlord's approval of plans and specifications for any Alterations, or Landlord's consent to Tenant's performing any Alterations. If, as the result of any Alterations made by or on behalf of Tenant, Landlord is required to make any alterations or improvements to any part of the Building in order to comply with any Requirements, whether or not in the Premises, Tenant shall pay all costs and expenses incurred by Landlord in connection with such alterations or improvements as provided in Article 21. ARTICLE 6 FLOOR LOAD Tenant shall not place a load upon any floor of the Premises that exceeds 50 pounds per square foot. Landlord reserves the right to reasonably designate the position of all heavy machinery, equipment and fixtures which Tenant wishes to place within the Premises, and to place limitations on the weight thereof, in accordance with the Rules and Regulations. ARTICLE 7 REPAIRS Section 7.1 LANDLORD'S REPAIR AND MAINTENANCE. Landlord shall operate, maintain and, except as provided in Section 7.2 hereof, make all necessary repairs (both structural and nonstructural) to (i) the Building Systems, (ii) the public portions of the Building (excepting, with respect to the Premises, glass and glass windows and doors, and the so-called store front), and (iii) the structural elements of the Building, both exterior and interior, including the roof, foundation and curtain wall, in conformance with standards applicable to first-class office buildings of comparable age and quality in midtown Manhattan, subject however to the provisions of Article 14 and Article 15. Section 7.2 TENANT'S REPAIR AND MAINTENANCE. Tenant shall, at its expense and in compliance with the requirements of this Lease, including Article 5, (i) keep neat and clean and in good order, condition and repair, the Premises and every part thereof, including, the store front and the exterior and interior portions of all doors, windows, plate glass, all plumbing and sewage facilities within and exclusively serving the Premises, fixtures, interior walls, floors, ceilings, signs, and all wiring, electrical systems, HVAC systems and equipment, and similar equipment exclusively serving the Premises, and (ii) make all nonstructural repairs to the Premises and the fixtures, equipment and appurtenances therein as and when needed to preserve the Premises in good working order, condition and repair, except for -12- 17 damage for which Tenant is not responsible pursuant to the provisions of Article 14 and Article 15. Tenant shall, at Tenant's expense, repaint and refurbish the Premises and any part or portion thereof, from time to time, to assure that the same are kept in a first-class, tenantable and attractive condition throughout the Term. The Premises shall be kept in a clean, sanitary and safe condition, in accordance with all applicable Requirements. The Tenant shall not permit or commit any waste. Without limiting the foregoing, all damage to the Premises or to any other part of the Building or the Center, or to any fixtures, equipment, sprinkler system and/or appurtenances thereof, whether requiring structural or nonstructural repairs, caused by or resulting from any act, omission, neglect or improper conduct of any Tenant Party, or Alterations made by any Tenant Party, or the moving of Tenant's fixtures, furniture or equipment, including machinery and heavy equipment, into, within or out of the Premises, shall be repaired at Tenant's expense. Such repairs shall be made by (A) Tenant, at Tenant's expense if the required repairs are nonstructural in nature and do not affect any Building System or any portion of the Building outside of the Premises, or (B) Landlord, at Tenant's expense, if the required repairs are structural in nature, involve replacement of exterior window glass or affect any Building System or any portion of the Building outside of the Premises. If such repairs are made by Landlord, Tenant shall reimburse Landlord for all costs and expenses incurred by Landlord promptly after demand therefore. Tenant shall give Landlord prompt notice of any defective condition of which Tenant is aware in any structural element or any Building System located in, servicing or passing through the Premises. All repairs made by Tenant shall be performed in a good and first-class workmanlike manner, shall be of a quality at least equal to the original work or construction using new construction materials, and shall be made in accordance with this Lease, including Article 5. If Tenant fails to proceed with due diligence to make any repairs required to be made by Tenant, Landlord may make such repairs, and all costs and expenses incurred by Landlord in connection therewith shall be paid by Tenant as provided in Article 21. Section 7.3 INTERRUPTIONS DUE TO REPAIRS. Landlord reserves the right to make all changes, alterations, additions, improvements, repairs or replacements to the Building and/or the Center, or any parts thereof, including to the Building Systems which provide services to Tenant, all as Landlord deems necessary or desirable. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises during the making of such changes, alterations, additions, improvements, repairs or replacements, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates, or to incur any other overtime costs or additional expenses whatsoever. There shall be no Rent abatement or allowance to Tenant for a diminution of rental value, no actual or constructive eviction of Tenant, in whole or in part, no relief from any of Tenant's other obligations under this Lease, and no liability on the part of Landlord, by reason of inconvenience, annoyance or injury to business arising from Landlord, Tenant or others making, or failing to make, any repairs, alterations, additions or improvements in or to any portion of the Center, the Building or the Premises, or in or to fixtures, appurtenances or equipment therein. ARTICLE 8 INCREASES IN REAL ESTATE TAXES AND OPERATING EXPENSES Section 8.1 DEFINITIONS. As used in this Article: (a) "BASE EXPENSE FACTOR" means the quotient, expressed in dollars and cents, of (i) the Operating Expenses payable for the Base Operating Year, divided by (ii) the Center Operating Area for the Base Operating Year. (b) "BASE TAX FACTOR" means the quotient, expressed in dollars and cents, of (i) the Taxes payable for the Base Tax Year, divided by (ii) the Center Tax Area for the Base Tax Year. (c) "CENTER OPERATING AREA" means the number of square feet in the rentable area of the Center which is operated and maintained by Landlord or an Affiliate of Landlord or at the expense of Landlord or an Affiliate of Landlord. Notwithstanding the foregoing, Landlord may elect, in its sole discretion from time to time, to: -13- 18 (i) subtract from the Center Operating Area the number of square feet in the rentable area of the Center operated and maintained by Landlord or an Affiliate of Landlord but (A) operated and maintained at the expense of any Person other than Landlord (or an Affiliate of Landlord) or (B) owned, as a condominium unit or otherwise, by any Person other than Landlord; (ii) add to the Center Operating Area to include the number of square feet in the additional rentable area of the Center operated and maintained by Landlord or an Affiliate of Landlord or at the expense of Landlord or an Affiliate of Landlord; or (iii) limit the Center Operating Area to the number of square feet in the rentable area of the Building. (d) "CENTER TAX AREA" means the number of square feet in the rentable area of the Center for which Taxes are payable by Landlord or an Affiliate of Landlord, excluding the rentable area of the Center for which Taxes are not payable. Notwithstanding the foregoing, Landlord may elect, in its sole discretion from time to time, to: (i) subtract from the Center Tax Area the number of square feet in the rentable area of the Center for which Taxes are not payable by Landlord or an Affiliate of Landlord; (ii) add to the Center Tax Area to include the number of square feet in the additional rentable area of the Center for which Taxes are payable by Landlord or an Affiliate of Landlord; or (iii) limit the Center Tax Area to the number of square feet in the rentable area of the Building. (e) "COMPUTATION YEAR" means each calendar year in which any part of the Term occurs and, in the case of a termination of this Lease pursuant to Article 19, in which any part of the Term would have occurred except for such termination. (f) "EXPENSE FACTOR" means the quotient, expressed in dollars and cents, of (i) the Operating Expenses payable for any Computation Year subsequent to the Base Operating Year, divided by (ii) the Center Operating Area for such Computation Year. (g) "LANDLORD'S STATEMENT" means an instrument or instruments, prepared by Landlord, containing a comparison of one or both of (i) the Base Tax Factor and the Tax Factor for any Tax Year, and (ii) the Base Expense Factor and the Expense Factor for any Computation Year. (h) "OPERATING EXPENSES" means all the costs and expenses of every kind and nature (and taxes, if any, thereon) paid or incurred by or on behalf of Landlord and/or its Affiliates with respect to the ownership, operation, maintenance, and repair of the Center, including, the costs incurred for: (i) air conditioning, ventilation, and heating; (ii) interior and exterior cleaning and rubbish removal, including supervisory fees of Landlord's Agent in connection therewith (provided that if such services are performed by Landlord's Agent, such costs shall not be materially in excess of those charged by outside contractors for similar services in comparable office buildings); (iii) window washing; (iv) elevators and escalators; (v) hand tools and other movable equipment; (vi) porter and matron service; (vii) electricity, gas, oil, steam, water rates, sewer rents and other utilities; (viii) association fees and dues; (ix) protection and security services; (x) compliance with any agreement with any Governmental Authority with respect to the maintenance of the Center or any part thereof as a landmark; (xi) insurance premiums; (xii) supplies; (xiii) wages, salaries, disability benefits, pensions, hospitalization, retirement plans, severance packages and group insurance for employees of Landlord and Landlord's Agent, up to and including the level of building managers and their immediate supervisors; (xiv) uniforms and working clothes for such -14- 19 employees and the cleaning thereof; (xv) expenses imposed pursuant to any collective bargaining agreement with respect to such employees; (xvi) payroll, social security, unemployment and other similar taxes with respect to such employees; (xvii) sales, use and similar taxes; (xviii) vault charges; (xix) franchise and license fees; (xx) charges of independent contractors performing work in connection with the operation, maintenance and repair of the Center; (xxi) legal, accounting and other professional fees of Landlord and Landlord's Agent; (xxii) installation, operation and maintenance of the Christmas tree for the Center and related holiday decorations, events open to the public and other promotional expenses intended to enhance the environment of the Center; (xxiii) landscaping costs; (xxiv) management fees, or if no management fee is being charged, an imputed management fee not in excess of the amount that would be paid to a property manager for managing a comparable first class office building in midtown Manhattan; (xxv) the annual depreciation or amortization, on a straight-line basis over such period as Landlord shall reasonably determine (with interest on the unamortized portion at the Base Rate plus 2% per annum), of any capital costs incurred after the Base Operating Year for any equipment, device or other improvement made or acquired which is either (A) intended as a labor-saving measure or to effect other economies in the operation, maintenance or repair of the Center (but only to the extent that the annual benefits anticipated to be realized therefrom are reasonably related to the annual amounts to be amortized), or (B) required by any Requirement. Operating Expenses shall not include (1) Taxes, special assessments and franchise, income or any other taxes imposed upon or measured by the income or profits of Landlord; (2) except for depreciation and amortization specifically included in Operating Expenses as provided above, the costs of all items which should be capitalized in accordance with generally accepted accounting practices; (3) the costs of all services furnished to any other tenant of the Center on a "rent inclusion" basis which are not provided to Tenant on such basis; (4) the costs of all work or services performed for any tenant in the Center (including Tenant) at such tenant's cost and expense; (5) mortgage amortization and interest; (6) leasing commissions; (7) allowances, concessions and other costs of tenant installations and decorations incurred in connection with preparing space for any tenant in the Center, including work letters and concessions; (8) fixed rent payable under Superior Leases, if any; (9) wages, salaries and benefits paid to any employees of Landlord and Landlord's Agent, above the level of the immediate supervisors of building managers; (10) legal and accounting fees relating to (i) disputes with tenants, prospective tenants or other occupants of the Center, (ii) disputes with purchasers, prospective purchasers, mortgagees or prospective mortgagees of the Center or any part thereof, (iii) negotiations of leases, contracts of sale or mortgages, or (iv) disputes with ground lessors under Superior Leases, if any; (11) costs which are reimbursed by insurance, warranty or condemnation proceeds, or which are reimbursable by Tenant or other tenants or any other Person other than pursuant to an expense escalation clause; (12) costs in the nature of penalties or fines; (13) the costs of all services, supplies and repairs paid to any Affiliate or subsidiary of Landlord or Landlord's Agent materially in excess of the costs that would be payable in an "arm's length" or unrelated situation; (14) advertising expenses in connection with leasing of the Center; (15) the costs of installing, operating and maintaining a specialty improvement, such as a cafeteria, lodging or private dining facility, unless Tenant is permitted to make use of any such facility without additional cost or on a subsidized basis consistent with other users; (16) the costs or expenses (including fines, interest, penalties and legal fees) arising out of Landlord's failure to timely pay Operating Expenses or Taxes; (17) the costs incurred in connection with the removal, encapsulation or other treatment of any Hazardous Materials classified as such and existing in the Premises as of the date hereof and required to be removed, encapsulated or treated under applicable Requirements in effect as of the date hereof; (18) the costs of acquiring works of fine art (as distinguished from the works of art and sculpture presently located at the Center and replacements, repairs and alterations thereto) located within the Center; (19) the annual depreciation or amortization of any capital costs incurred for any equipment, device or other improvement made or acquired to remedy violations of any Requirements which exist on the date hereof of which violations Landlord has received written notice prior to the date of this Lease; and (20) charitable and political contributions. Landlord shall not recover under this Section 8.1 any item of cost more than once. (i) "TAXES" means all taxes and assessments from time to time imposed upon the Center or any part thereof, including assessments made as a result of the Center or any part thereof being within a business improvement district, other than any interest or penalties imposed in connection therewith, and all expenses, including fees and disbursements of counsel and experts, reasonably incurred by Landlord -15- 20 in connection with any application for a reduction in the assessed valuation for the Center or for a judicial review thereof (but in no event shall such expenses be included in Taxes payable for the Base Tax Year). If due to a future change in the method of taxation any franchise, income, profit or other tax shall be levied in substitution in whole or in part for or in lieu of any tax which would otherwise constitute a Tax, or in addition thereto, such franchise, income, profit or other tax shall be deemed to be a Tax for the purposes of this Lease and Tenant shall be obligated to pay its share thereof in accordance with the provisions of this Lease. (j) "TAX FACTOR" means the quotient, expressed in dollars and cents, of (i) the Taxes payable for any Computation Year subsequent to the Base Tax Year, divided by (ii) the Center Tax Area for such Computation Year. (k) "TAX YEAR" means the 12 month period commencing July 1 of each year, or such other 12 month period as may be duly adopted as the fiscal year for real estate tax purposes by the City of New York. Section 8.2 TAX PAYMENTS. (a) If the Tax Factor for any Computation Year exceeds the Base Tax Factor, Tenant shall pay to Landlord, as Additional Rent during each Computation Year, an amount ("Tenant's Tax Payment") equal to (i) Tenant's Area, multiplied by (ii) the amount by which the Tax Factor for such Computation Year exceeds the Base Tax Factor. Landlord may furnish to Tenant, prior to the commencement of each Computation Year, a Landlord's Statement setting forth Landlord's estimate of Tenant's Tax Payment for such Computation Year. If Landlord furnishes an estimate of Tenant's Tax Payment prior to the commencement of a Computation Year, then Tenant shall pay to Landlord on the first day of each month during such Computation Year, an amount equal to 1/12th of Landlord's estimate of Tenant's Tax Payment for such Computation Year. If Landlord shall not furnish any such estimate for a Computation Year prior to the commencement thereof, then (x) until the first day of the month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 8.2(a) for the last month of the preceding Computation Year; (y) after such estimate is furnished to Tenant, if the payments previously made by Tenant on account of Tenant's Tax Payment for such Computation Year were greater or less than the installments of Tenant's Tax Payment to be made in accordance with such estimate, then (1) if there is a deficiency, Tenant shall pay the amount thereof to Landlord within 10 Business Days after such estimate is furnished to Tenant, or (2) if there has been an overpayment by Tenant, then Landlord shall credit such overpayment against subsequent installments of payments on account of Rent due hereunder, however, if said estimate is received by Tenant after the expiration or termination of the Term, then Landlord shall refund such overpayment to Tenant promptly thereafter; and (z) on the first day of the month following the month in which such estimate is furnished to Tenant and monthly thereafter throughout such Computation Year, Tenant shall pay to Landlord an amount equal to 1/12th of Tenant's Tax Payment shown on such estimate. Landlord may elect, but shall no obligation to, during each Computation Year, furnish to Tenant a revised Landlord's Statement of Landlord's estimate of Tenant's Tax Payment for such Computation Year, and in such case, Tenant's Tax Payment for such Computation Year shall be adjusted and any deficiencies paid or overpayments credited, as the case may be, substantially in the same manner as provided in the preceding sentence. After the end of each Computation Year, Landlord shall furnish to Tenant a Landlord's Statement of Taxes for such Computation Year, and (A) if such Landlord's Statement shall show that the sums so paid by Tenant were less than Tenant's Tax Payment for such Computation Year, then Tenant shall pay to Landlord the amount of such deficiency in Tenant's Tax Payment within 10 Business Days after such Landlord's Statement is furnished to Tenant, or (B) if such Landlord's Statement shall show that the sums so paid by Tenant were more than Tenant's Tax Payment for such Computation Year, Landlord shall credit such overpayment in Tenant's Tax Payment against subsequent installments of Rent payable by Tenant, however, if said Landlord's Statement is received by Tenant after the expiration or termination of the Term, then Landlord shall refund such overpayment to Tenant promptly thereafter. If there shall be any increase in the Taxes for any Computation Year, whether during or after such Computation Year, or if -16- 21 there shall be any decrease in the Taxes for any Computation Year, Tenant's Tax Payment for such Computation Year shall be appropriately adjusted and any deficiencies paid or overpayments credited, as the case may be, substantially in the same manner as provided in the preceding sentence. (b) Tenant shall be obligated to pay Tenant's Tax Payment regardless of whether Tenant may be exempt from the payment of taxes as the result of any reduction, abatement, or exemption from Taxes granted or agreed to by any Governmental Authority, or by reason of Tenant's diplomatic status or other tax exempt status. The benefit of any discount for any early payment of Taxes shall accrue solely to the benefit of Landlord. (c) Tenant shall not (and hereby waives any and all rights it may now or hereafter have to) institute or maintain any action, proceeding or application in any court or other body having the power to fix or review assessed valuations, for the purpose of reducing Taxes. Without limitation, the filing of any such proceeding by Tenant without Landlord's prior consent in each instance shall be a default hereunder. (d) Tenant shall pay, prior to the due date thereof, all occupancy or rent taxes now in effect or hereafter enacted and applicable to Tenant's occupancy of the Premises, regardless of whether imposed by its terms upon Landlord or Tenant, and if any such tax is payable by Landlord, Tenant shall promptly reimburse the amount thereof to Landlord upon demand, as Additional Rent. Tenant shall pay all taxes assessed or imposed upon personal property, fixtures and equipment within the Premises prior to the due date thereof. Tenant shall also pay all license fees and other charges which may be imposed upon the business of Tenant conducted upon the Premises. Section 8.3 OPERATING EXPENSE PAYMENTS. (a) If the Expense Factor for any Computation Year exceeds the Base Expense Factor, Tenant shall pay to Landlord, as Additional Rent during each Computation Year, an amount ("Tenant's Operating Payment") equal to (i) Tenant's Area, multiplied by (ii) the amount by which the Expense Factor for such Computation Year exceeds the Base Expense Factor. For each Computation Year, Landlord shall furnish to Tenant a statement setting forth Landlord's good faith estimate of Tenant's Operating Payment for such Computation Year. If Landlord furnishes an estimate of Tenant's Operating Payment prior to the commencement of a Computation Year, then Tenant shall pay to Landlord, on the first day of each month during such Computation Year, an amount equal to 1/12th of Landlord's estimate of Tenant's Operating Payment for such Computation Year. If Landlord does not furnish any such estimate for a Computation Year until after the commencement thereof, then (A) until the first day of the month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section 8.3 (a) during the last month of the preceding Computation Year, (B) promptly after such estimate is furnished to Tenant or together therewith, Landlord shall give notice to Tenant stating whether the payments previously made by Tenant on account of Tenant's Operating Payment for such Computation Year were greater or less than the installments of Tenant's Operating Payment to be made for such Computation Year in accordance with such estimate, and (1) if there shall be a deficiency, Tenant shall pay the amount thereof within 10 Business Days after receipt of such notice, or (2) if there shall have been an overpayment, Landlord shall credit the amount thereof against subsequent installments of payments on account of Rent due hereunder, however, if said estimate is received by Tenant after the expiration or termination of the Term, then Landlord shall refund such overpayment to Tenant promptly thereafter, and (C) on the first day of the month following the month in which such estimate is furnished to Tenant, and on the first day of each month thereafter throughout the remainder of such Computation Year, Tenant shall pay to Landlord an amount equal to 1/12th of Tenant's Operating Payment shown on such estimate. (b) After the end of each Computation Year, Landlord shall furnish to Tenant a Landlord's Statement of Tenant's Operating Payment for such Computation Year. If Landlord's Statement shows that the sums paid by Tenant exceeded the actual amount of Tenant's Operating Payment for such Computation Year, then Landlord shall credit the amount of such excess against subsequent installments of Rent due hereunder, however, if said Landlord's Statement is received by Tenant after the expiration or -17- 22 earlier termination of the Term, then Landlord shall refund such excess to Tenant promptly thereafter. If Landlord's Statement shows that the sums paid by Tenant were less than Tenant's Operating Payment for such Computation Year, then Tenant shall pay the amount of such deficiency within 10 Business Days after Tenant's receipt of Landlord's Statement. Section 8.4 CERTAIN ADJUSTMENTS. (a) If the Center Operating Area is increased or decreased, from time to time, pursuant to Section 8.1(c), then from and after the date of such increase or decrease, Operating Expenses for purposes of this Lease shall be those Operating Expenses of the Center which are properly allocable, in Landlord's reasonable judgment, to the space included in the Center Operating Area, as so increased or decreased. Such allocation shall be performed by Landlord in good faith in a manner consistent with the methods and principles employed by Landlord in computing Operating Expenses prior to the date of such increase or decrease. If Landlord performs such an allocation, then Landlord shall, in its reasonable discretion, equitably adjust the calculation of the amount of Operating Expenses for the Base Operating Year to account for such increase or decrease. (b) Taxes shall not include any taxes and assessments imposed upon any portion of the Center excluded from the calculation of the Center Tax Area pursuant to Section 8.1(d) above. If Landlord has elected to limit the Center Tax Area to the number of square feet in the rentable area of the Building pursuant to Section 8.1(d)(iii), then Taxes for purposes of this Lease shall be calculated as follows: (i) if the Building is separately assessed for tax purposes, the Taxes imposed shall be the Taxes imposed on the Building; or (ii) if the Building is not separately assessed then Taxes shall be, as determined by Landlord, either (x) a portion of the Taxes imposed upon the Center, determined in the same proportion that the rentable area of the Building bears to the aggregate rentable area in all buildings in the Center, or (y) a portion of the Taxes imposed upon the tax lot on which the Building is located, determined in the same proportion that the rentable area of the Building bears to the aggregate rentable area in all buildings located on such tax lot. (c) If the Rent Commencement Date shall be a day other than January 1 or the Expiration Date shall be a day other than December 31, or if there is any abatement of Fixed Rent payable under this Lease (other than any abatement under Article 1 hereof) or any termination of this Lease (other than a termination pursuant to Article 19), or if there is any increase or decrease in Tenant's Area, or if there is any increase or decrease in the Center Operating Area or the Center Tax Area, then in each such event, in applying the provisions of this Article with respect to the Tax Year or Computation Year in which the event occurred, appropriate adjustments shall be made to reflect the result of such event on a basis consistent with the principles underlying the provisions of this Article, taking into consideration (i) the portion of such Tax Year or Computation Year, as the case may be, which shall have elapsed prior to or after such event, (ii) the rentable area of the Premises or the Center Operating Area or the Center Tax Area affected thereby, and (iii) the duration of such event. (d) If during all or any part of any Computation Year (including the Base Operating Year) Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would constitute an Operating Expense) to a rentable portion of the Center which is not then leased, then Operating Expenses for such period shall include an amount equal to the costs and expenses which would have been incurred by Landlord and/or its Affiliates for such work or service during such period (as determined by Landlord in its good faith) if the Center had been 95% leased and occupied. (e) If during all or any part of any Computation Year (including the Base Operating Year) Landlord is not obligated to furnish any particular work or service (the cost of which, if performed by Landlord, would constitute an Operating Expense) to any portion of the Center (other than to space not then leased), then notwithstanding anything to the contrary set forth in Section 8.1(h), the amount included in Operating Expenses for such period with respect to such work or service shall be equal to the product of (i) the Center Operating Area multiplied by (ii) the quotient expressed in dollars and cents, of (A) the costs and expenses actually incurred by Landlord during such period to furnish such work or service, divided by (B) the area of the Center to which Landlord provides such work or service. Without limiting the provisions of Section 8.1(h), if subsequent to the Base Operating Year, Landlord commences furnishing any particular type or category of work or service which is not furnished in the Base Operating -18- 23 Year, the cost of which is included in Operating Expenses, then Landlord shall, in its reasonable discretion equitably adjust the calculation of Operating Expenses for the Base Operating Year to account for such additional type or category of work or service. Section 8.5 NON-WAIVER. Landlord's failure to render a Landlord's Statement on a timely basis with respect to any Computation Year shall not prejudice Landlord's right to thereafter render a Landlord's Statement with respect to such Computation Year or any subsequent Computation Year, nor shall the rendering of a Landlord's Statement prejudice Landlord's right to thereafter render a corrected Landlord's Statement for any Computation Year. Section 8.6 TENANT DISPUTES. Each Landlord's Statement sent to Tenant shall be conclusively binding upon Tenant unless Tenant shall (i) within 30 days after such statement is sent, pay to Landlord the amount set forth in such statement, without prejudice to Tenant's right to dispute such statement, and (ii) within 90 days after such statement is sent, send a notice to Landlord objecting to such statement and specifying the reasons for Tenant's claim that such statement is incorrect. In no event shall Tenant withhold payment of any portion of amounts set forth in a Landlord's statement. Tenant covenants and agrees that Tenant will not employ, in connection with any dispute under this Lease, any Person who is to be compensated, in whole or in part, on a contingency fee basis. If the parties are unable to resolve any such dispute within 30 days following the giving of Tenant's notice of objection, either party may refer the issues raised to an independent firm of certified public accountants selected by Landlord and reasonably acceptable to Tenant, and the decision of such accountants shall be conclusively binding upon Landlord and Tenant. In connection therewith, Tenant and such accountants shall execute and deliver to Landlord a confidentiality agreement, in form and substance reasonably satisfactory to Landlord, whereby such parties agree not to disclose to any third party any of the information obtained in connection with such review, or the substance of any admissions or stipulations by any party in connection therewith, or of any resulting reconciliation, compromise or settlement. Tenant shall pay the fees and expenses relating to such procedure, unless such accountants shall determine that Landlord overstated the Expense Factor by more than 5% for such Computation Year, as finally determined, in which case Landlord shall pay such fees and expenses. ARTICLE 9 REQUIREMENTS OF LAW Section 9.1 (a) TENANT'S COMPLIANCE. Tenant, at its expense, shall comply (or cause to be complied) with all Requirements applicable to the Premises, regardless of whether imposed by their terms upon Landlord or Tenant. If Tenant obtains knowledge of any failure to comply with any Requirements applicable to the Premises, Tenant shall give Landlord prompt notice thereof. All repairs and alterations, whether ordinary or extraordinary, required to be made to cause the Premises (which shall include all means of access and egress to, from and between the floors comprising parts of the Premises) to comply with any Requirements shall be made at Tenant's expense. If such repairs or alterations are nonstructural, do not affect any Building System, and do not involve the performance of work outside of the Premises, then they shall be made by Tenant, in accordance with the requirements of this Lease, including Article 5. If such repairs or alterations are structural, affect any Building System, or involve the performance of work outside the Premises, then at Landlord's option, they shall be made by Landlord and, within 10 days after demand therefore, Tenant shall reimburse Landlord for all costs and expenses incurred by Landlord in connection therewith. Notwithstanding anything to the contrary contained herein, Tenant agrees that within the Premises (which shall include all means of access and egress to, from and between the floors comprising parts of the Premises), it shall be responsible for compliance with the Americans With Disabilities Act (42 U.S.C. Section 12101 et seq.) and the regulations and Accessibility Guidelines for Buildings and Facilities issued pursuant thereto. (b) HAZARDOUS MATERIALS. Tenant shall not (i) cause or permit any Hazardous Materials to be brought into or onto the Center, (ii) cause or permit the storage, handling, or use of Hazardous Materials in any manner not permitted by any Requirements, or (iii) cause or permit the escape, disposal or release of any Hazardous Materials within or in the vicinity of the Center. Nothing -19- 24 herein shall be deemed to prevent Tenant's use of commercially available cleansers which may contain Hazardous Materials; provided that (i) such cleansers are ordinarily and customarily used in the operation of health club facilities, and (ii) any such use is in accordance with all Requirements. Tenant shall be responsible, at its expense, for all matters directly or indirectly based on, or arising or resulting from, the actual or alleged presence of Hazardous Materials in the Premises, the Building or the Center which arises out of or results from Tenant, Tenant's use of the Premises, those acting on behalf of Tenant or any Tenant Party. Tenant shall provide to Landlord copies of all communications received by Tenant with respect to any Requirements relating to Hazardous Materials, and any claims made in connection therewith. Landlord or its agents may perform environmental inspections of the Premises at any time. Without limitation, Tenant agrees (A) to notify Landlord immediately of any contamination, claim of contamination, loss or damage in connection with Hazardous Materials, (B) after consultation with and approval by Landlord, to clean up the contamination in full compliance with applicable Requirements, and (C) to indemnify, defend and hold Landlord harmless from and against any claims, suits, causes of action, costs and fees, including attorneys' fees, arising out of or resulting from any such contamination, claim of contamination, loss or damage. No consent or approval of Landlord shall in any way be construed as imposing upon Landlord any liability for the means, methods or manner of removal, containment or other compliance with applicable Requirements. (c) LANDLORD'S INSURANCE. Tenant shall not cause or permit any action or condition that would (i) invalidate or conflict with Landlord's insurance policies, (ii) violate applicable rules, regulations and guidelines of the Fire Department, Fire Insurance Rating Organization or any other authority having jurisdiction over the Center, (iii) cause an increase in the premiums for any insurance then covering the Building over that payable with respect to comparable first-class office buildings, or (iv) result in insurance companies of good standing refusing to insure the Building or any property therein in amounts and against risks as reasonably determined by Landlord. If any insurance premiums increase as a result of Tenant's failure to comply with the provisions of this Article, then Tenant shall promptly cure such failure and shall reimburse Landlord for the increased insurance premiums paid by Landlord as a result of such failure by Tenant. In any action or proceeding to which Landlord and Tenant are parties, a schedule or "make up" of rates for the Building or the Premises issued by the appropriate Fire Insurance Rating Organization, or other body fixing such insurance rates, shall be conclusive evidence of the insurance rates then applicable to the Building. Section 9.2 FIRE ALARM SYSTEM: SPRINKLERS. Tenant shall install, and thereafter maintain in good order and repair, a sprinkler system and fire-alarm and life-safety system serving the Premises. Such installation and maintenance shall be performed by Tenant in accordance with this Lease, the Rules and Regulations and all Requirements. If the Fire Insurance Rating Organization or any Governmental Authority or any of Landlord's insurers requires or recommends any modifications or Alterations be made or any additional equipment be supplied in connection with the sprinkler system or fire-alarm and life-safety system serving the Building or the Premises by reason of Tenant's business, or the location of the equipment, trade fixtures, or other contents of the Premises, Landlord (to the extent such modifications or Alterations are structural, affect any Building System or involve the performance of work outside the Premises), or Tenant (to the extent such modifications or Alterations are nonstructural, do not affect any Building System and do not involve the performance of work outside the Premises) shall make such modifications or Alterations, and supply such additional equipment, in either case at Tenant's expense. Section 9.3 LIMITATIONS ON RENT. If at any time during the Term, the Rent is not fully collectible by reason of any Requirement, Tenant shall take such other steps as Landlord may request, and as may be legally permissible, to permit Landlord to collect the maximum rents which may during the continuance of such restriction be legally permissible (but not in excess of the Rent reserved under this Lease). Upon the termination of such restriction during the Term, Tenant shall pay to Landlord, in addition to the Rent for the period following such termination, if legally permissible, the portion of Rent which would have been paid pursuant to this Lease but for such legal restriction, less the Rent paid by Tenant to Landlord while such restriction was in effect, together with interest thereon at the Base Rate. -20- 25 ARTICLE 10 QUIET ENJOYMENT Provided this Lease is in full force and effect and no Event of Default then exists, Tenant may peaceably and quietly enjoy the Premises without hindrance by Landlord or any Person lawfully claiming through or under Landlord, subject to the terms and conditions of this Lease and all Superior Leases and Mortgages. ARTICLE 11 SUBORDINATION Section 11.1 SUBORDINATION AND ATTORNMENT. (a) This Lease and Tenant's rights hereunder are subject and subordinate to all Mortgages and Superior Leases. At the request of any Mortgagee or Lessor, Tenant shall attorn to such Mortgagee or Lessor, its successors in interest or any purchaser in a foreclosure sale. (b) If a Lessor or Mortgagee or any other Person shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action, or the delivery of a new lease or deed, or otherwise, then at the request of the successor landlord and upon such successor landlord's written agreement to accept Tenant's attornment and to recognize Tenant's interest under this Lease, Tenant shall be deemed to have attornment to and recognized such successor landlord as Landlord under this Lease. The provisions of this Article 11 are self-operative and require no further instruments to give effect hereto; provided, however, that Tenant shall promptly execute and deliver any instrument that such successor landlord may reasonably request (1) evidencing such attornment, (2) setting forth the terms and conditions of Tenant's tenancy, and (3) containing such other terms and conditions as may be required by such Mortgagee or Lessor, provided such terms and conditions do not increase the Rent, materially increase Tenant's non-Rent obligations or materially and adversely affect Tenant's rights under this Lease. Upon such attornment, this Lease shall continue in full force and effect as a direct lease between such successor landlord and Tenant upon all of the terms, conditions and covenants set forth in this Lease except that such successor landlord shall not be: (i) liable for any act or omission of Landlord (except to the extent such act or omission is a default under this Lease and continues beyond the date when such successor landlord succeeds to Landlord's interest and Tenant gives notice of such act or omission to such successor landlord); (ii) subject to any defense, claim, counterclaim, set-off or offset which Tenant may have against Landlord; (iii) bound by any prepayment of more than one month's Rent to any prior landlord; (iv) bound by any obligation to make any payment to Tenant which was required to be made prior to the time such successor landlord succeeded to Landlord's interest, excepting only the obligation of Landlord to provide Landlord's Contribution in accordance with the terms of this Lease; (v) bound by any obligation to perform any work or to make improvements to the Premises except for (A) repairs and maintenance required to be made by the landlord under this Lease, and (B) repairs to the Premises as a result of damage by fire or other casualty, or partial condemnation, pursuant to the provisions of this Lease, but only to the extent that such repairs can reasonably be made from the net proceeds of any insurance or condemnation awards actually made available to such successor landlord; or -21- 26 (vi) bound by any modification, amendment or renewal of this Lease made without the consent of any Lessor or Mortgagee of which Tenant has been provided notice. (c) Any Mortgagee may elect that this Lease shall have priority over the Mortgage that it holds and, upon notification to Tenant by such Mortgagee, this Lease shall be deemed to have priority over such Mortgage, regardless of the date of this Lease. In connection with any financing of the Real Property or the Center, or of the interest of the lessee under any Superior Lease, Tenant shall consent to any reasonable modifications of this Lease requested by any lender, provided such modifications do not increase the Rent, materially increase Tenant's non-Rent obligations or materially and adversely affect Tenant's rights under this Lease. Section 11.2 TERMINATION BY TENANT. As long as any Superior Lease or Mortgage shall exist, Tenant shall not seek to terminate this Lease by reason of any act or omission of Landlord (i) until Tenant shall have given notice of such act or omission to all Lessors and/or Mortgagees, and (ii) until a reasonable period of time shall have elapsed following the giving of notice of such default and the expiration of any applicable notice or grace periods (unless such act or omission is not capable of being remedied within a reasonable period of time) during which period such Lessors and/or Mortgagees shall have the right, but not the obligation, to remedy such act or omission. If any Lessor or Mortgagee elects to remedy such act or omission of Landlord, Tenant shall not seek to terminate this Lease so long as such Lessor or Mortgagee is proceeding with reasonable diligence to effect such remedy. Section 11.3 FUTURE CONDOMINIUM DECLARATION. This Lease and Tenant's rights hereunder are and will be subject and subordinate to any condominium declaration, by-laws and other instruments (collectively, the "Declaration") which may be recorded in order to subject the Building to a condominium form of ownership pursuant to Article 9-13 of the New York Real Property Law or any successor statute, provided that the Declaration does not by its terms increase the Rent, materially increase Tenant's non-Rent obligations or materially and adversely affect Tenant's rights under this Lease. At Landlord's request, and subject to the foregoing proviso, Tenant will execute and deliver to Landlord an amendment of this Lease confirming such subordination and modifying this Lease to conform to such condominium regime. Section 11.4 APPLICABILITY. The provisions of this Article shall (i) inure to the benefit of Landlord, any future owner of the Real Property, any Lessor or Mortgagee and any sublessor thereof, and (ii) apply notwithstanding that, as a matter of law, this Lease may terminate upon the termination of any Superior Lease or the foreclosure of any Mortgage. Section 11.5 NON-DISTURBANCE AGREEMENTS. As a condition to Tenant's agreement hereunder to subordinate Tenant's interest in this Lease to any Mortgage and/or any Superior Lease, Landlord shall obtain from each Mortgagee or Lessor an agreement, in recordable form and in the standard form customarily employed by such Mortgagee or Lessor, pursuant to which such Mortgagee or Lessor shall agree that if and so long as no Event of Default hereunder shall have occurred and be continuing, the leasehold estate granted to Tenant and the rights of Tenant pursuant to this Lease to quiet and peaceful possession of the Premises shall not be terminated, modified, affected or disturbed by any action which such Mortgagee may take to foreclose any such Mortgage, or which such Lessor shall take to terminate such Superior Lease, as applicable, and that any successor landlord shall recognize this Lease as being in full force and effect as if it were a direct lease between such successor landlord and Tenant upon all of the terms, covenants, conditions and options granted to Tenant under this Lease, except as otherwise provided in Section 11.1(b) hereof (any such agreement, a "Non-Disturbance Agreement"). ARTICLE 12 SERVICES Section 12.1 ELEVATORS. Landlord shall make available to Tenant at least one freight elevator serving the Premises upon Tenant's prior request, on a non-exclusive "first come, first serve" basis with -22- 27 other Building tenants, on all Business Days from 8:00 a.m. to 12:00 noon, and from 1:00 p.m. to 5:00 p.m. Section 12.2 [Intentionally Deleted] Section 12.3 CHILLED WATER. For and with respect to the Operating Hours (as hereinafter defined), Landlord, at Tenant's request, shall provide Tenant with 95 tons of chilled water (at 6 watts per useable square foot for lighting, power and heat loads) for the heating, ventilation and air-conditioning ("HVAC") system to be installed by Tenant, at Tenant's cost and expense, as part of the Initial Installations. Tenant shall pay Landlord, as additional rent, for all chilled water provided to Tenant in excess of 95 tons, within 10 days after rendition of a bill therefor, an annual charge at the rate of $750.00 per ton (the "Chilled Water Charge"). The Chilled Water Charge shall be subject to a cost of living increase for each year after the first year included within the Term. In that regard, on the first calendar anniversary of the Commencement Date (such date and each ensuing anniversary thereof being referred to hereinafter as a "Chilled Water Adjustment Date"), and on each Chilled Water Adjustment Date thereafter during the Term, the Chilled Water Charge shall be increased above the initial Chilled Water Charge in the same proportion as the Consumer Price Index for all Urban Consumers (CPI-U): New York, New York-Northeastern New Jersey Average, All Items (unadjusted) (1982-84=100), published monthly by the U.S. Department of Labor, or if said index ceases to be published, a comparable index reflecting changes in the cost of living and designated by Landlord (the "Price Index") has increased, if at all, as of the Chilled Water Adjustment Date in question above the Price Index as of the Commencement Date, and each such increased figure shall then become the Tenant's Chilled Water Charge and shall remain in effect until the next Chilled Water Adjustment Date. In no event shall anything contained herein permit the Chilled Water Charge to be reduced below the amount of the initial Chilled Water Charge specified hereinabove. Landlord shall not be liable to Tenant for any failure or defect in the supply or character of chilled water supplied to Tenant by reason of any Requirement, or any act or omission of the public service company serving the Building, or for any other reason not caused by the gross negligence or willful misconduct of Landlord, its agents, contractors and employees. In addition to the foregoing Chilled Water Charge, at the time of the initial hookup by Tenant of any HVAC equipment and at the time of installation of any supplementary or auxiliary HVAC equipment to serve the Premises, or if Tenant's requirements for chilled water require additional connections or enlargements to existing connections to Landlord's chilled water ducts, Tenant shall pay to Landlord a "tap-in" fee for each connection equal to the greater of (i) $1,500.00, which rate shall be increased on each anniversary of the Commencement Date based on the percentage increase in the Price Index, if any, over that in effect on the immediately preceding anniversary of the Commencement Date and (ii) the "tap-in" fee which Landlord shall then have established as customary for the Building. All hookups and "tap-ins" shall be performed by Landlord, on Tenant's behalf and at Tenant's expense. Section 12.4 OVERTIME BUILDING SERVICES. The Rent does not reflect or include any charge to Tenant for the furnishing of any building services such as freight elevator service or chilled water other than to the extent expressly and specifically set forth in Sections 12.1, 12.2 and 12.3 above. Landlord shall not be required to furnish any building services at any times ("Overtime Periods") other than the times specifically described in this Lease for the provision of such building services unless Tenant delivers notice to Landlord's property management office serving the Building requesting such services, such notice to be delivered on a Business Day at least 24 hours prior to the time at which such services are to be provided. If Landlord furnishes elevator service, chilled water or any other building service to the Premises during Overtime Periods, Tenant shall pay to Landlord Landlord's then established rates for supplying such overtime building services in the Building. Landlord shall not be obligated to furnish any building services to the Premises other than as expressly and specifically set forth in this Article 12. Section 12.5 CLEANING. Tenant shall, at its cost and expense, cause the Premises to be cleaned, substantially in accordance with the standards established by Landlord from time-to-time. All cleaning contractors employed by Tenant to perform cleaning services shall be subject to the prior written approval of Landlord in each instance. In connection therewith, Tenant shall permit Landlord or its designees (as designated by Landlord, the "Cleaning Contractor") to perform such services, on Tenant's behalf and at Tenant's expense, as follows: prior to entering into any contracts for cleaning services, -23- 28 Tenant shall forward to Landlord a statement setting forth the name of the proposed cleaning contractor, the rates and other material terms and conditions of said cleaning services contract. Landlord shall have the right, exercisable by written notice given to Tenant within 30 days after receipt of Tenant's notice, to elect to have the Cleaning Contractor designated by Landlord perform such cleaning services upon the terms and conditions, and at the rates, set forth in Tenant's notice. If Landlord timely gives notice of its exercise of said right to Tenant, then promptly thereafter Tenant and the Cleaning Contractor shall enter into a contract for provision of cleaning services upon such terms. If Landlord fails to exercise such rights in a timely fashion, then Tenant may, within 45 days thereafter, enter into a contract for cleaning services upon the terms and conditions specified in the notice previously delivered to Landlord. Section 12.6 WATER AND STEAM. Landlord will install meters to measure the water furnished to the Premises. Within 10 days after request therefore, Tenant shall pay the cost of the installation of said meters, for all maintenance, repairs and replacements to said meters, and from time to time, upon receipt of bills from Landlord therefore, all costs and expenses incurred by Landlord in furnishing water to the Premises, including Landlord's reasonable charge for any required pumping or heating thereof and any sewer or utility tax, fee or charge now or hereafter assessed or imposed upon the Premises or the Real Property pursuant to any Requirement, plus an administrative charge for Landlord's supervision and overhead equal to 3% of such costs and expenses. Tenant shall be entitled to use and shall pay for all live steam consumed in and upon the Premises. Landlord shall, at Tenant's cost and expense, install meters to measure consumption of steam. Within 10 days after request therefore, Tenant shall pay the cost of the installation of said meters and for all maintenance, repairs and replacements to said meters. All payments for steam shall be made either to Landlord or directly to the public utility corporation or corporations furnishing live steam to the Building, as Landlord may from time to time specify. If such payments are to be made to a public utility corporation, they shall be made as and when due and payable. If such payments are to be made to Landlord, they shall be at the rate charged to consumers by the aforesaid public utility corporations, together with Landlord's reasonable charge for any required pumping thereof, and any tax, fee, or charge now or hereafter assessed, or imposed upon the Premises or the Real Property pursuant to any Requirement, plus an administrative charge for Landlord's supervision and overhead equal to 3% of such amounts. All such payments shall be due as additional rent within 10 days after bills are rendered by Landlord. Landlord shall not be liable to Tenant for any failure or defect in the supply or character of water and/or steam supplied to Tenant by reason of any Requirement, or any act or omission of the public service company serving the Building, or for any other reason not caused by the gross negligence or willful misconduct of Landlord, its agents, contractors and employees. Landlord shall maintain, repair and replace the meter referred to above at Tenant's expense. Section 12.7 REFUSE AND RUBBISH REMOVAL. All trash, refuse and rubbish shall be kept in covered trash receptacles, which trash receptacles shall be kept within the Premises at all times and in no event stored outside of the same. In accordance with Landlord's direction, on a daily basis Tenant shall cause all trash to be removed to a designated area of the loading dock located at the Building. Tenant shall pay to Landlord within 10 days after request therefor, Landlord's reasonable charges for removal of refuse and rubbish. Tenant shall not dispose of any refuse and rubbish in the public areas of the Center or any part thereof, and if any Tenant Party does so, Tenant shall be liable for Landlord's reasonable charge for such removal. Tenant shall cause all Tenant Parties to observe such additional rules and regulations regarding rubbish removal and/or recycling as Landlord may, from time to time, reasonably impose. Section 12.8 LISTING IN BUILDING DIRECTORY. Landlord shall, at the request of Tenant, maintain a listing on the Center directory in the Building lobby of the name of Tenant. Section 12.9 SERVICE INTERRUPTIONS. Landlord reserves the right to suspend any building service when necessary, by reason of Unavoidable Delays, accidents or emergencies, or for repairs, alterations or improvements which, in Landlord's reasonable judgment, are necessary or appropriate, until such Unavoidable Delay, accident or emergency shall cease or such repairs, alterations or improvements are completed, and Landlord shall not be liable to Tenant for any interruption, curtailment or failure to supply -24- 29 services. Landlord shall use reasonable efforts to restore such service, remedy such situation and minimize interference with Tenant's business, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates, or to incur any other overtime costs or additional expenses whatsoever. The exercise of any such right or the occurrence of any such failure by Landlord shall not (i) constitute an actual or constructive eviction, in whole or in part, (ii) entitle Tenant to any compensation, abatement or diminution of Rent, (iii) relieve Tenant from any of its obligations under this Lease, or (iv) impose any liability upon Landlord by reason of inconvenience to Tenant, or interruption of Tenant's business, or otherwise. Section 12.10 RENT ABATEMENT. Not withstanding anything to the contrary contained in this Lease, if Tenant is unable to use the entire Premises for the ordinary conduct of Tenant's business due solely to (a) an interruption of an Essential Service (as hereinafter defined) resulting from Landlord's performance of an improvement or repair to the Building or (b) Landlord's breach of an obligation under this Lease to perform repairs or replacements which results in Landlord's failure to provide an Essential Service, in each case other than as a result of Unavoidable Delays, casualty or condemnation, and such condition continues for a period in excess of 10 consecutive days on which pursuant to Section 36.2(b) of this Lease Tenant is required to keep the Premises open for business after (i) Tenant furnishes a notice to Landlord (the "Abatement Notice") stating that Tenant's inability to use the Premises is solely due to such condition, (ii) Tenant does not actually use or occupy any portion of the Premises during such period, and (iii) such condition has not resulted from the negligence or misconduct of Tenant or any Tenant Party, then Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment shall be abated on a per diem basis for the period commencing on the 11th day after Tenant delivers the Abatement Notice to Landlord and ending on the earlier of (x) the date Tenant reoccupies any portion of the Premises, and (y) the date on which such condition is substantially remedied. "Essential Service" shall mean a service which Landlord is obligated under this Lease to provide to Tenant which if not provided shall (1) deny access to the Premises, (2) threaten the health or safety of any occupants of the Premises or (3) prevent the usage of more than 25% of the Premises for the ordinary conduct of Tenant's business. ARTICLE 13 INSURANCE, PROPERTY LOSS OR DAMAGE: REIMBURSEMENT Section 13.1 TENANT'S INSURANCE. (a) Tenant, at its expense, shall obtain and keep in full force and effect during the Term: (i) a policy of commercial general liability insurance on an occurrence basis against claims for personal injury, death and/or property damage occurring in or about the Premises or the Center, in the broadest and most comprehensive form then generally available from time to time, under which Tenant is named as the insured and Landlord, Landlord's managing agent, any Lessors, any Mortgagees and any other parties whose names shall have been furnished by Landlord to Tenant from time to time are named as additional insureds, which insurance shall provide primary coverage without contribution from any other insurance carried by or for the benefit of Landlord, Landlord's managing agent or any Lessors or Mortgagees named as additional insureds, and Tenant agrees to obtain blanket broad-form contractual liability coverage to insure its indemnity obligations set forth in Article 32 hereof. The minimum limits of liability shall be a combined single limit with respect to each occurrence in an amount of not less than $5,000,000.00 and in an amount of not less than $10,000,000.00 in the aggregate; provided, however, that Landlord may require Tenant to increase such coverage, from time to time, to that amount of insurance which in Landlord's reasonable judgment is then being customarily required by landlords for similar health-club facilities in first-class buildings in the City of New York. If the aggregate limit applying to the Premises is reduced by the payment of a claim or establishment of a reserve equal to or greater than 50% of the annual aggregate, Tenant shall immediately arrange to have the aggregate limit restored by endorsement to the existing policy or the purchase of an additional insurance policy unless, in Landlord's reasonable judgment, Tenant maintains sufficient excess liability insurance to satisfy the liability requirements of this Lease without the reinstatement of the aggregate limit; -25- 30 (ii) insurance against loss or damage by fire, and such other risks and hazards as are insurable under then available standard forms of "all risk" property insurance policies with extended coverage, insuring Tenant's Property, and all Alterations and improvements to the Premises (including the Initial Installations) for the full insurable value thereof or replacement cost value thereof, having a deductible amount, if any, as reasonably determined by Landlord; (iii) during the performance of any Alteration (including the Initial Installations), until completion thereof, builder's risk insurance on an "all risk" basis and on a completed value form including a "permission to complete and occupy endorsement", for full replacement value covering the interest of Landlord and Tenant (and their respective contractors and subcontractors), any Mortgagee and any Lessor, in all work incorporated in the Building and all materials and equipment in or about the Premises; (iv) workers' compensation insurance, in amounts and with coverages as required by law; (v) business interruption insurance in an amount of not less than 12 months of the Rent payable under this Lease; and (vi) such other insurance in such amounts as Landlord, any Mortgagee and/or any Lessor may reasonably require from time to time. (b) All insurance required to be carried by Tenant pursuant to the terms of this Lease (i) shall contain a provision that (A) no act or omission of Tenant shall affect or limit the obligation of the insurance company to pay the amount of any loss sustained, (B) the policy shall be noncancellable and/or no material change in coverage shall be made thereto unless Landlord, Lessors and Mortgagees shall have received 30 days' prior notice of the same by certified mail, return receipt requested, and (C) Tenant shall be solely responsible for the payment of all premiums under such policies and Landlord, Lessors and Mortgagees shall have no obligation for the payment thereof, and (ii) shall be effected under valid and enforceable policies issued by reputable and independent insurers permitted to do business in the State of New York, and rated in Best's Insurance Guide, or any successor thereto (or if there be none, an organization having a national reputation) as having a Best's Rating of "A-" and a "Financial Size Category" of at least "IX" or if such ratings are not then in effect, the equivalent thereof or such other financial rating as Landlord may at any time consider appropriate. (c) On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate policies of insurance, including evidence of waivers of subrogation, required to be carried by Tenant pursuant to this Article. Evidence of each renewal or replacement of a policy shall be delivered by Tenant to Landlord at least 10 days prior to the expiration of such policy. In lieu of the policies of insurance required to be delivered to Landlord pursuant to this Article 13 (collectively, the "Policies"), Tenant may deliver to Landlord a certification or certifications from Tenant's insurance company or companies (on the form currently designated "Accord 27", or the equivalent, rather than on the form currently designated "Accord 25-S", or the equivalent) which shall be binding on Tenant's insurance company, and which shall expressly provide that such certification (i) conveys to Landlord and any other named insured and/or additional insureds thereunder (the "Insured Parties") all the rights and privileges afforded under the applicable Policies as primary insurance, and (ii) contains an unconditional obligation of the insurance company to advise all Insured Parties in writing by certified mail, return receipt requested, at least 30 days in advance of any termination of or change to the applicable Policies that would affect the interest of any of the Insured Parties. Section 13.2 WAIVER OF SUBROGATION. Landlord and Tenant shall each procure an appropriate clause in or endorsement to any property insurance covering the Premises, the Building and personal property, fixtures and equipment located therein, wherein the insurance companies shall waive subrogation or consent to a waiver of right of recovery, and Landlord and Tenant agree not to make any claim against, or seek to recover from, the other, for any loss or damage to its property or the property of -26- 31 others resulting from fire and other hazards to the extent covered by such property insurance; provided, however, that the release, discharge, exoneration and covenant not to sue contained herein shall be limited by and coextensive with the terms and provisions of the waiver of subrogation or waiver of right of recovery. If the payment of an additional premium is required for the inclusion of, or consent to, a waiver of subrogation, each party shall advise the other, in writing, of the amount of any such additional premiums and the other party may pay such additional premium. If such other party shall not elect to pay such additional premium, then notwithstanding the foregoing provisions, the first party shall not be required to obtain such waiver of subrogation or consent to waiver of right of recovery. Tenant acknowledges that Landlord shall not be obligated to carry insurance on, and shall not be responsible for, (i) damage to any Alterations or improvements to the Premises (including the Initial Installations), (ii) Tenant's Property, and (iii) any loss suffered by Tenant due to interruption of Tenant's business. ARTICLE 14 DESTRUCTION - FIRE OR OTHER CAUSE Section 14.1 RESTORATION. (a) If the Premises are damaged by fire or other casualty, or if the Building is damaged such that Tenant is deprived of reasonable access to the Premises, Tenant shall give prompt notice to Landlord, and Landlord shall repair the core and shell of the Premises and all Building Systems (or the damaged portion thereof) up to the point of connection to the Premises, at its expense, to substantially the condition thereof prior to the damage, subject to the provisions of this Article 14, and of any Mortgage or Superior Lease. Landlord shall have no obligation to repair or restore, and Tenant shall at its cost and expense, repair and replace Tenant's Property, and any Alterations or improvements to the Premises (including the Initial Installations), to substantially the condition prior to the damage. So long as Tenant is not in default beyond applicable grace or notice provisions in the payment or performance of its obligations under this Section 14.1, then until the restoration of the core and shell of the Premises is Substantially Completed or would have been Substantially Completed but for Tenant Delay, Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment shall be abated or reduced in the proportion by which the area of the part of the Premises which is not usable (or accessible) and is not used by Tenant bears to the total area of the Premises. Nothing set forth in this Section 14.1 shall be interpreted to limit Landlord's right to repair or restore all or any portion of the Premises at such time and in such manner as Landlord deems appropriate in Landlord's sole judgment, and no such repair or restoration shall constitute a waiver by Landlord of any of Landlord's rights set forth in this Section 14.1 or elsewhere in this Lease. Section 14.2 LANDLORD'S TERMINATION RIGHT. Notwithstanding anything to the contrary contained in Section 14.1, if the Premises are totally damaged or are rendered wholly untenantable, or if the Building is so damaged that in Landlord's opinion, substantial alteration, demolition, or reconstruction of the Building is required (whether or not the Premises are so damaged or rendered untenantable), then in either of such events, Landlord may, not later than 60 days following the date of the damage, give Tenant a notice terminating this Lease, provided that if the Premises are not damaged, Landlord may not terminate this Lease unless Landlord similarly terminates the leases of other tenants in the Building covering, in the aggregate, at least 50% of the rentable area of the Building which is or was occupied immediately prior to such damage. If this Lease is so terminated, (i) the Term shall expire upon the date set forth in Landlord's notice (with the same effect as if such date were the Expiration Date), which shall not be less than 30 days after such notice is given, and Tenant shall vacate the Premises and surrender the same to Landlord no later than the date set forth in the notice, (ii) Tenant's liability for Rent which accrues thereafter shall cease as of the date of the damage, (iii) any prepaid Rent for any period after the date of the damage shall be refunded by Landlord to Tenant, and (iv) Landlord shall be entitled to collect all insurance proceeds of policies held by Landlord or Tenant providing coverage for Alterations and other improvements to the Premises (including the Initial Installations). Landlord shall retain from such proceeds from Tenant's insurance an amount equal to the unamortized portion of the sum total of amounts paid by Landlord for such Alterations and improvements (including the Initial Installations), whether by contribution, offset or otherwise, and the balance of such proceeds, if any, shall be paid to Tenant, such amortization to be calculated using a straight-line amortization schedule over the useful life -27- 32 of the Alteration or improvement determined in accordance with generally accepted accounting principles consistently applied, with interest thereon at the Base Rate plus 2% per annum. Section 14.3 TENANT'S TERMINATION RIGHT. If the Premises are totally damaged and are thereby rendered wholly untenantable, or if the Building shall be so damaged that Tenant is deprived of reasonable access to the Premises, and if Landlord elects to restore the core and shell of the Premises, Landlord shall, within 60 days following the date of the damage, cause a contractor or architect selected by Landlord to give notice (the "Restoration Notice") to Tenant of the date by which such contractor or architect estimates the restoration of the Premises shall be Substantially Completed. If such date, as set forth in the Restoration Notice, is more than 18 months from the date of such damage, then Tenant shall have the right to terminate this Lease by giving notice (the "Termination Notice") to Landlord not later than 30 days following Tenant's receipt of the Restoration Notice. If Tenant delivers a Termination Notice to Landlord within said 30 day period, then this Lease shall be deemed to have terminated as of the date of the giving of the Termination Notice, in the manner and subject to the conditions set forth in the second sentence of Section 14.2. Section 14.4 FINAL 24 MONTHS. Notwithstanding anything set forth to the contrary in this Article 14, in the event that any damage rendering the Premises wholly untenantable occurs during the final 24 months of the Term, either Landlord or Tenant may terminate this Lease by notice to the other party within 30 days after the occurrence of such damage and this Lease shall expire on the 30th day after the date of such notice. For purposes of this Section 14.4, the Premises shall be deemed wholly untenantable if due to such damage, Tenant shall be precluded from using more than 50% of the floor area of the Premises for the conduct of its business and Tenant's inability to so use the Premises is reasonably expected to continue until at least the earlier of the (i) Expiration Date, or (ii) the 90th day after the date when such damage occurs. Section 14.5 WAIVER OF REAL PROPERTY LAW SECTION 227. This Article constitutes an express agreement governing any case of damage or destruction of the Premises or the Building by fire or other casualty, and Section 227 of the Real Property Law of the State of New York, which provides for such contingency in the absence of an express agreement, and any other law of like nature and purpose now or hereafter in force, shall have no application in any such case. Section 14.6 INABILITY TO COLLECT. Notwithstanding any of the foregoing provisions of this Article 14, if Landlord or any Lessor or Mortgagee shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the Premises or the Building by reason of any action or inaction on the part of Tenant or any Tenant Party, then, without prejudice to any other remedies which may be available against Tenant, (i) there shall be no abatement of Rent, and (ii) Landlord shall have no obligation to restore the core and shell of the Premises or the Building Systems. Section 14.7 LANDLORD'S LIABILITY. Any Building employee to whom any property shall be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenant's agent with respect to such property and neither Landlord nor any of the Indemnitees shall be liable for any damage to such property, or for the loss of or damage to any property of Tenant by theft or otherwise. Neither Landlord nor any of the other Indemnitees shall be liable for any injury or damage to persons or property or interruption of Tenant's business resulting from fire or other casualty, any damage caused by other tenants or persons in the Building or by construction of any private, public or quasi-public work, or any latent defect in the Premises or in the Building (except that Landlord shall be required to repair the same to the extent expressly provided in Article 7). Without limitation, Tenant agrees to use and occupy the Premises at its own risk, and neither Landlord nor any Indemnitees shall have any responsibility or liability for any loss of or damage to Tenant's Property or other personal property of Tenant or those claiming by, through or under Tenant. No penalty shall accrue for delays which may arise by reason of adjustment of insurance on the part of Landlord or Tenant, or Unavoidable Delays, or in connection with any repair or restoration of any portion of the Premises or of the Building or of the Center. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises during the performance of any such repair or restoration; provided, however, Landlord shall have no obligation to employ contractors or -28- 33 labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever. Nothing in this Section 14.7 shall affect any right of Landlord to be indemnified by Tenant pursuant to the provisions of Article 32 for payments made to compensate for losses of third parties. Section 14.8 WINDOWS. If at any time any windows of the Premises are temporarily closed, darkened or covered over by reason of repairs, maintenance, alterations or improvements to the Building, or any of such windows are permanently closed, darkened or covered over due to any Requirement, Landlord shall not be liable for any damage Tenant may sustain and Tenant shall not be entitled to any compensation or abatement of any Rent, nor shall the same release Tenant from its obligations hereunder or constitute an actual or constructive eviction. Section 14.9 RESTORATION BY TENANT. Unless this Lease is terminated as provided in this Article 14, if the Premises shall be damaged by fire or other casualty, then Tenant shall (i) repair and restore all portions of the Premises not required to be restored by Landlord pursuant to this Article 14 to substantially the condition at the time of such casualty, (ii) equip the Premises with trade fixtures, equipment and all personal property necessary or proper for the operation of Tenant's business; and (iii) open for business in the Premises as soon thereafter as possible. ARTICLE 15 EMINENT DOMAIN Section 15.1 (a) TOTAL TAKING. If all or substantially all of the Premises, the Building or the Real Property shall be acquired or condemned for any public or quasi-public purpose, this Lease shall terminate and the Term shall end as of the date of the vesting of title, with the same effect as if such date were the Expiration Date. (b) PARTIAL TAKING. If only a part of the Premises, the Building or the Real Property shall be acquired or condemned, this Lease and the Term shall continue in full force and effect, provided that from and after the date of the vesting of title, Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment shall be modified to reflect the reduction of the Premises and/or the Building as a result of such acquisition or condemnation. (c) LANDLORD'S TERMINATION RIGHT. Whether or not the Premises are affected, Landlord may give to Tenant, within 60 days following the date upon which Landlord receives notice that all or a portion of the Building or the Real Property has been acquired or condemned, a notice of termination of this Lease, provided that Landlord elects to terminate leases (including this Lease) affecting at least 50% of the rentable area of the Building (excluding any rentable area leased by Landlord or its Affiliates). (d) TENANT'S TERMINATION RIGHT. If the part of the Building or the Real Property so acquired or condemned contains a substantial part of the total area of the Premises immediately prior to such acquisition or condemnation, or if by reason of such acquisition or condemnation, Tenant no longer has reasonable means of access to the Premises, Tenant may terminate this Lease by notice to Landlord given within 60 days following the date upon which Tenant received notice of such acquisition or condemnation. If Tenant so notifies Landlord, this Lease shall terminate and the Term shall end and expire upon the date set forth in the notice (with the same effect as if such date were the Expiration Date), which date shall not be more than 30 days following the giving of such notice. If a part of the Premises shall be so acquired or condemned and this Lease and the Term shall not be terminated in accordance with this Section 15.1, Landlord, at Landlord's expense but without requiring Landlord to spend more than it collects as an award, shall, subject to the provisions of any Mortgage or Superior Lease, restore that part of the Premises not so acquired or condemned to a self-contained rental unit substantially equivalent (with respect to character, quality, appearance and services) to that which existed immediately prior to such acquisition or condemnation, excluding Tenant's Property, and/or any Alterations or improvements, including the Initial Installations. -29- 34 (e) APPORTIONMENT OF RENT. Upon any termination of this Lease pursuant to the provisions of this Article 15, Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment shall be apportioned as of, and shall be paid or refunded up to and including, the date of such termination. (f) APPLICABILITY. The provisions of Sections 15.1 and 15.2 shall not apply to any acquisition or condemnation of all or any part of the Premises for a period of 18 months or less. Section 15.2 AWARDS. Upon any acquisition or condemnation of all or any part of the Premises, the Building or the Real Property, Landlord shall receive the entire award for any such acquisition or condemnation, and Tenant shall have no claim against Landlord or the condemning authority for the value of any unexpired portion of the Term or for the Alterations or other improvements, including the Initial Installations; and Tenant hereby assigns to Landlord all of its right in and to such award. Without limiting the foregoing, out of the net amount of any such award actually received by Landlord (after deducting costs of recovery, taxes, amounts payable to lenders, reasonable attorneys fees, and the like), if any, provided that Tenant shall have certified the amount of Tenant's Leasehold Improvement Costs (hereinafter defined) to Landlord within 90 days after the Rent Commencement Date, Tenant shall be entitled to an amount equal to the unamortized portion of the Tenant's Leasehold Improvement Costs. The "Tenant's Leasehold Improvement Costs" shall mean the actual costs incurred by Tenant in constructing the Initial Installations, but excluding costs for moveable and trade fixtures, furniture, equipment and any other personal property, design costs, legal fees, engineering fees and other soft costs and also excluding the Landlord's Contribution. Such amortization shall be calculated using a straight-line amortization schedule over the useful life of the Alteration or Improvement determined in accordance with generally accepted accounting principles consistently applied, with interest thereon at the Base Rate plus 2% per annum. Nothing contained in this Article shall be deemed to prevent Tenant from making a separate claim in any condemnation proceedings for the then-value of any Tenant's Property included in such taking and for any moving expenses, provided any such award is in addition to, and does not result in a reduction of, the award made to Landlord. Section 15.3 TEMPORARY TAKING. Notwithstanding the provisions of Section 5.1, if all or any part of the Premises is acquired or condemned for a period of 18 months or less during the Term for any public or quasi-public use or purpose, Tenant shall give prompt notice to Landlord, and the Term shall not be reduced or affected in any way, and Tenant shall continue to pay all Rent payable by Tenant without reduction or abatement and to perform all its other obligations under this Lease, except to the extent prevented from doing so by the condemning authority. Tenant shall be entitled to receive any award or payment from the condemning authority for such use, which award shall be received, held and applied by Tenant as a trust fund for payment of Rent falling due, provided that if the acquisition or condemnation is for a period extending beyond the Term, such award shall be apportioned between Landlord and Tenant and Landlord shall receive the portion of such award relating to the period after the Term. If the acquisition or condemnation of all or any part of the Premises is for a period of more than 18 months, the provisions of Sections 15.1 and 15.2 shall apply. ARTICLE 16 ASSIGNMENT AND SUBLETTING Section 16.1 (a) NO ASSIGNMENT OR SUBLETTING. Except as expressly set forth herein, Tenant shall not assign, mortgage, pledge, encumber, license or otherwise transfer this Lease, whether by operation of law or otherwise, and shall not sublet (or underlet), or permit, or suffer the Premises or any part thereof to be used or occupied by others, without Landlord's prior consent in each instance. Any assignment, sublease, mortgage, pledge, encumbrance, license or transfer in contravention of the provisions of this Article 16 shall be void. (b) COLLECTION OF RENT. If, without Landlord's consent, this Lease is assigned, or any part of the Premises is sublet or occupied by anyone other than Tenant, or this Lease or the Premises or any of Tenant's Property is encumbered (by operation of law or otherwise), Landlord may collect rent from the assignee, subtenant or occupant and apply the net amount collected to the Rent herein reserved. No -30- 35 such collection of rent shall be deemed to be (i) a waiver of the provisions of this Article, (ii) an acceptance of the assignee, subtenant or occupant as tenant, or (iii) a release of Tenant from the performance of any of the terms, covenants and conditions to be performed by Tenant under this Lease, including the payment of Rent. (c) NO WAIVER. Landlord's consent to any assignment or subletting shall not relieve Tenant from the obligation to obtain Landlord's express consent to any further assignment or subletting. In no event shall any permitted subtenant assign or encumber its sublease or further sublet any portion of its sublet space, or otherwise suffer or permit any portion of the sublet space to be used or occupied by others. The listing of any name other than that of Tenant in the directory, or on the doors of the Premises or elsewhere, shall not vest in any such named party any right or interest in this Lease or in the Premises, nor be deemed to constitute Landlord's consent to any assignment or transfer of this Lease, or to any sublease of the Premises, or to the use or occupancy thereof by others. Section 16.2 TENANT'S NOTICE. If Tenant desires to assign this Lease or sublet all or any portion of the Premises, Tenant shall give notice thereof to Landlord, which shall be accompanied by (i) with respect to an assignment of this Lease, the date Tenant desires the assignment to be effective, and (ii) with respect to a sublet of all or a part of the Premises, (A) the material business terms on which Tenant would sublet such premises, and (B) a description of the portion of the Premises to be sublet. Such notice shall be deemed an offer from Tenant to Landlord whereby Landlord (or Landlord's designee) shall be granted the right, at Landlord's option (1) to terminate this Lease with respect to such space as Tenant proposes to sublease, upon the terms and conditions hereinafter set forth, or (2) if the proposed transaction is an assignment of this Lease or a subletting of 50% or more of the rentable square footage of the Premises, to terminate this Lease with respect to the entire Premises. Such option may be exercised by notice from Landlord to Tenant within 45 days after Landlord's receipt of Tenant's notice. Section 16.3 LANDLORD'S TERMINATION. If Landlord exercises its option to terminate all or a portion of this Lease pursuant to Section 16.2: (i) this Lease shall end and expire with respect to all or a portion of the Premises, as the case may be, on the date that such assignment or sublease was to commence (as if such date were the Expiration Date), (ii) Fixed Rent and Tenant's Tax Payment and Tenant's Operating Payment shall be apportioned, paid or refunded as of such date, (iii) Tenant, upon Landlord's request, shall enter into an amendment of this Lease ratifying and confirming such total or partial termination, and setting forth any appropriate modifications to the terms and provisions hereof, (iv) Landlord shall be free to lease the Premises (or any part thereof) to Tenant's prospective assignee or subtenant, and (v) if this Lease shall terminate with respect to a portion of the Premises, Tenant shall, at Tenant's sole cost and expense, separately demise such portion of the Premises, and make available all utility services so as to make such portion of the Premises a self-contained rental unit satisfactory in all respects to Landlord and in compliance with all Requirements. Section 16.4 CONDITIONS TO ASSIGNMENT OR SUBLETTING. (a) With respect to each and every assignment and/or subletting authorized by Landlord under the provisions of this Lease, it is further agreed that: (i) the form of the proposed assignment or sublease shall be reasonably satisfactory to Landlord and shall comply with the provisions of this Article; (ii) no sublease shall be for a term ending later than one day prior to the Expiration Date of this Lease; (iii) no sublease shall be delivered to any subtenant, and no subtenant shall take possession of any part of the Premises, until an executed counterpart of such sublease has been delivered to Landlord and approved in writing by Landlord; (iv) if an Event of Default shall occur at any time prior to the effective date of such assignment or subletting, then Landlord's consent thereto, if previously granted, shall be immediately deemed revoked without further notice to Tenant, and if such assignment or -31- 36 subletting would have been permitted without Landlord's consent pursuant to Section 16.8, such permission shall be void and without force and effect, and in either such case, any such assignment or subletting shall constitute a further Event of Default hereunder; and (v) each sublease shall be subject and subordinate to this Lease and to the matters to which this Lease is or shall be subordinate, it being the intention of Landlord and Tenant that Tenant shall assume and be liable to Landlord for any and all acts and omissions of all subtenants and anyone claiming under or through any subtenants which, if performed or omitted by Tenant, would be a default under this Lease; and Tenant and each subtenant shall be deemed to have agreed that upon the occurrence and during the continuation of an Event of Default hereunder, Tenant has hereby assigned to Landlord, and Landlord may, at its option, accept such assignment of, all right, title and interest of Tenant as sublandlord under such sublease, together with all modifications, extensions and renewals thereof then in effect, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that Landlord shall not be (A) liable for any previous act or omission of Tenant under such sublease, (B) subject to any counterclaim, offset or defense not expressly provided in such sublease, which theretofore accrued to such subtenant against Tenant, (C) bound by any previous modification of such sublease not consented to by Landlord, or by any prepayment of more than one month's rent and additional rent under such sublease, (D) bound to return such subtenant's security deposit, if any, except to the extent that Landlord shall receive actual possession of such deposit and such subtenant shall be entitled to the return of all or any portion of such deposit under the terms of its sublease, or (E) obligated to make any payment to or on behalf of such subtenant, or to perform any work in the subleased space or the Building, or in any way to prepare the subleased space for occupancy, beyond Landlord's obligations under this Lease. The provisions of this Section 16.4(b)(v) shall be self-operative, and no further instrument shall be required to give effect hereto, provided that the subtenant shall execute and deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such subordination and attornment. Section 16.5 NO RELEASE OF TENANT: INDEMNIFICATION OF LANDLORD. Notwithstanding any assignment or subletting or any acceptance of Rent by Landlord from any assignee or subtenant, Tenant shall remain fully liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant shall be deemed a default under this Lease by Tenant. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any and all Losses (as defined in Section 32.1(b)) arising out of or resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any brokers or other Persons claiming a commission or similar compensation in connection with the proposed assignment or sublease, irrespective of whether Landlord shall give or decline to give its consent to any proposed assignment or sublease, or if Landlord shall exercise any of its options under this Article 16. Section 16.6 TENANT'S FAILURE TO COMPLETE. If Landlord consents to a proposed assignment or sublease and Tenant fails to execute and deliver to Landlord such assignment or sublease within 90 days after the giving of such consent, then Tenant shall again comply with all of the provisions and conditions of Sections 16.2 and 16.4 hereof before assigning this Lease or subletting all or part of the Premises. Section 16.7 PROFITS. If Tenant shall enter into any assignment or sublease permitted hereunder or consented to by Landlord, Tenant shall, within 60 days after Landlord's consent to such assignment or sublease, deliver to Landlord a complete list of Tenant's reasonable third-party brokerage fees, legal fees and architectural fees paid or to be paid in connection with such transaction, together with a list of all of Tenant's Property to be transferred to such assignee or sublessee. Tenant shall deliver to Landlord evidence of the payment of such fees promptly after the same are paid. In consideration of such assignment or subletting, Tenant shall pay to Landlord: (a) In the case of an assignment, on the effective date of the assignment, an amount equal to 50% of all sums and other consideration paid to Tenant by the assignee for or by reason -32- 37 of such assignment (including sums paid for the sale or rental of Tenant's Property), less (i) in the case of a sale of Tenant's Property, the then fair market value thereof, as reasonably determined by Landlord, (ii) the reasonable out-of-pocket costs and expenses incurred by Tenant in connection with said assignment such as brokerage fees, legal fees, architectural fees and advertising fees paid to unrelated third parties, and (iii) costs approved in advance by Landlord incurred by Tenant for Alterations made solely to prepare the Premises or portions thereof for such assignment; or (b) In the case of a sublease, 50% of any consideration payable under the sublease to Tenant by the subtenant which exceeds, on a per square foot basis, Fixed Rent and Additional Rent accruing during the term of the sublease in respect of the subleased space (together with any sums paid for the sale or rental of Tenant's Property), less (i) in the case of the sale of Tenant's Property, the then fair market value thereof, as reasonably determined by Landlord, (ii) the reasonable out-of-pocket costs and expenses incurred by Tenant in connection with said sublease, such as brokerage fees, legal fees, architectural fees and advertising fees paid to unrelated third parties, (iii) costs approved in advance by Landlord incurred by Tenant for Alterations made solely to prepare the Premises or portion thereof for such subletting, and (iv) if such sublease is of less than the entire Premises, the actual cost incurred by Tenant in separately demising the subleased space. The sums payable under this clause shall be paid by Tenant to Landlord as and when paid by the subtenant to Tenant. Section 16.8 (a) TRANSFERS. If Tenant is a corporation, the transfer by one or more transfers, directly or indirectly, by operation of law or otherwise, of a majority of the stock of Tenant shall be deemed a voluntary assignment of this Lease; provided, however, that the provisions of this Article shall not apply to the transfer of shares of stock of Tenant if and so long as the voting of stock of Tenant is publicly traded on a nationally recognized stock exchange. For purposes of this Section 16.8 the term "transfers" shall be deemed to include the issuance of new stock or of treasury stock which results in a majority of the stock of Tenant being held by a Person or Persons that do not hold a majority of the stock of Tenant on the date hereof. If Tenant is a partnership, the transfer by one or more transfers, directly or indirectly, by operation of law or otherwise, of a majority interest in the partnership or otherwise in violation of the provisions of Section 29.2 shall be deemed a voluntary assignment of this Lease. If Tenant is a limited liability company, trust, or any other legal entity (including a corporation or partnership), the transfer by one or more transfers, directly or indirectly, of Control of such entity, however characterized, shall be deemed a voluntary assignment of this Lease. Notwithstanding the provisions of Section 16.1, Landlord will not unreasonably withhold its consent to an assignment of this Lease in connection with transactions with an entity into or with which Tenant is merged or consolidated or to which all or substantially all of Tenant's assets are transferred so long as: (i) such entity shall agree with Landlord to be bound by all of the obligations of Tenant hereunder; (ii) such assignment shall not relieve Tenant of any of its obligations hereunder; (iii) such transfer was made for a legitimate independent business purpose and not for the purpose of transferring this Lease, (iv) the successor to Tenant has a net worth computed in accordance with generally accepted accounting principles at least equal to the greater of (A) the net worth of Tenant immediately prior to such merger, consolidation or transfer, and (B) the net worth of the original Tenant on the date of this Lease, and (v) in Landlord's sole judgment such entity has the business experience and good reputation necessary to conduct the business permitted hereunder (i.e. the operation of first class health club facilities in major urban areas), in a manner consistent with the high quality of Tenant named herein, and is of a character which is in keeping with the standards for the Building and the Center and the occupancy thereof. Without limitation, Landlord and Tenant acknowledge and agree that based on the unique business operation of the Tenant named herein, as of the date of this Lease, there are no other health club operators that operate or conduct businesses consistent with the high quality of the tenant named herein. (b) APPLICABILITY. The limitations set forth in this Section 16.8 shall apply to subtenant(s), assignee(s) and guarantor(s) of this Lease, if any, and any transfer by any such entity in violation of this Section 16.8 shall be a transfer in violation of Section 6.1. -33- 38 (c) MODIFICATIONS, TAKEOVER AGREEMENTS. Any modification, amendment or extension of a sublease and/or any other agreement by which a landlord (or its affiliate) of a building other than the Building agrees to assume or perform the obligations of Tenant under this Lease shall be deemed a sublease for the purposes of Section 16.1 hereof. Section 16.9 ASSUMPTION OF OBLIGATIONS. Any assignment or transfer, whether made with Landlord's consent or without Landlord's consent, if and to the extent permitted hereunder, shall not be effective unless and until the assignee executes, acknowledges and delivers to Landlord (i) an agreement in form and substance satisfactory to Landlord whereby the assignee (A) assumes Tenant's obligations under this Lease, and (B) agrees that, notwithstanding such assignment or transfer, the provisions of Section 16.1 hereof shall be binding upon it in respect of all future assignments and transfers, and (ii) certificates or policies of insurance as required under Article 13. Section 16.10 TENANT'S LIABILITY. The joint and several liability of Tenant and any successors-in-interest of Tenant and the due performance of Tenant's obligations under this Lease shall not be discharged, released or impaired by any agreement or stipulation made by Landlord, or any grantee or assignee of Landlord, extending the time, or modifying any of the terms and provisions of this Lease, or by any waiver or failure of Landlord, or any grantee or assignee of Landlord, to enforce any of the terms and provisions of this Lease. Section 16.11 LEASE NOT AFFIRMED OR REJECTED. If at any time after an assignment by Tenant named herein, this Lease is not affirmed or rejected in any proceeding of the types described in Section 19.1(h) or (i) or any similar proceeding, or upon a termination of this Lease due to any such proceeding, Tenant named herein, upon request of Landlord given within 30 days after such disaffirmance, rejection or termination (and actual notice thereof to Landlord in the event of a disaffirmance or rejection or in the event of termination other than by act of Landlord), shall (i) pay to Landlord all Rent and other charges due and owing by the assignee to Landlord under this Lease to and including the date of such disaffirmance, rejection or termination, and (ii) as "tenant," enter into a new lease of the Premises with Landlord for a term commencing on the effective date of such disaffirmance, rejection or termination and ending on the Expiration Date, unless sooner terminated in accordance therewith, at the same Rent and upon the then executory terms, covenants and conditions contained in this Lease, except that (A) the rights of Tenant named herein under the new lease shall be subject to the possessory rights of the assignee under this Lease and the possessory rights of any Persons claiming through or under such assignee or by virtue of any statute or of any order of any court, (B) such new lease shall require all defaults existing under this Lease to be cured by Tenant named herein with due diligence, and (C) such new lease shall require Tenant named herein to pay all Rent which, had this Lease not been so disaffirmed, rejected or terminated, would have become due under the provisions of this Lease after the date of such disaffirmance, rejection or termination with respect to any period prior thereto. If Tenant named herein defaults in its obligations to enter into such new lease for a period of 10 days after Landlord's request, then, in addition to all other rights and remedies by reason of default, either at law or in equity, Landlord shall have the same rights and remedies against Tenant named herein as if it had entered into such new lease and such new lease had thereafter been terminated as of the commencement date thereof by reason of Tenant's default thereunder. Section 16.12 ASSIGNMENT TO A WHOLLY-OWNED SUBSIDIARY. Notwithstanding the foregoing provisions, Tenant may upon not less than 30 days prior notice to Landlord, one time during the Term, assign this Lease to a wholly-owned subsidiary of Tenant (but only for such period of time as such corporation shall remain a wholly-owned subsidiary of Tenant, it being agreed that the subsequent sale or transfer of stock resulting in a change of voting control, or any other transaction(s) having the overall effect that such corporation ceases to be a wholly-owned subsidiary of Tenant, shall be treated as if such sale or transfer or transaction(s) were, for all purposes, an assignment of this Lease prohibited by the provisions of Section 16.1); provided, however, and it shall be a condition precedent of the validity of any such assignment, that (i) such wholly-owned subsidiary first agree in writing, directly with Landlord, to be bound by all of the obligations of Tenant hereunder, including the obligation to pay Rent and other amounts provided for under this Lease, the covenant to use the Premises only for the purposes specifically permitted under this Lease, and the covenant against any further assignment, and (ii) the -34- 39 Tenant shall execute and deliver to Landlord documents satisfactory to Landlord in its sole discretion confirming that such assignment shall not relieve Tenant of any of its obligations hereunder, and that Tenant shall remain fully and primarily liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant's part to be performed and observed, and that any default under any term, covenant or condition of this Lease by any such subsidiary shall be deemed a default by Tenant under this Lease. Section 16.13 PERMITTED SUBLEASES. (a) Notwithstanding the foregoing, provided that no Event of Default has occurred hereunder, upon not less than 30 days prior notice to Landlord, Tenant may sublet not more than 7,000 rentable square feet of the Premises for use as a private cafe (i.e. not open to the public and providing food and services only to Tenant's members) (said 7,000 rentable square feet to be inclusive of all areas used in connection with cafe operations, including all kitchen and seating areas), provided that each and every one of the following conditions are fully and completely satisfied: (i) said cafe shall be operated in a first-class fashion and manner, not materially different from the cafe (not the restaurant) operated on the date of this Lease in the Reebok Sports Club facility referred to in Section 36.2(c); (ii) the Premises continue to be operated a first-class health club/sports club facility in accordance with the requirements of this Lease; (iii) the subleased portion of the Premises shall be operated and maintained in a first-class condition, in accordance with the requirements of this Lease and the then-standards of the Building and the Center; (iv) the proposed subtenant has, in Landlord's reasonable judgment, sufficient financial means to perform all of its obligations under the sublease; (v) Tenant shall, upon demand, reimburse Landlord for all costs and expenses incurred by Landlord in connection with such sublease, including reviewing any plans and specifications for Alterations proposed to be made in connection therewith, and all legal fees and expenses incurred by Landlord; (vi) the proposed sublease shall comply with all of the requirements of this Lease, including Section 16.4 hereof, excepting only the obligations of Tenant pursuant to Section 16.7; and (vii) notwithstanding any such sublease, Tenant shall remain fully and primarily liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant shall be deemed a default by Tenant hereunder. (b) Notwithstanding the foregoing, provided that no Event of Default has occurred hereunder, upon not less than 30 days prior notice to Landlord, Tenant may sublet not more than 4,500 rentable square feet of the Premises for use as a private spa facility (i.e. not open to the public and providing services only to Tenant's members), provided that each and every one of the following conditions are fully and completely satisfied: (i) said private spa facility shall be operated in a first-class fashion and manner not materially different from the spa facility operated on the date of this Lease in the Reebok Sports Club facility referred to in Section 36.2(c); (ii) the Premises continue to be operated a first-class health club/sports club facility in accordance with the requirements of this Lease; (iii) the subleased portion of the Premises shall be operated and maintained in a first-class condition, in accordance with the requirements of this Lease and the then-standards of the Building and the Center; (iv) the proposed subtenant has, in Landlord's reasonable judgment, sufficient financial means to perform all of its obligations under the sublease; (v) Tenant shall, upon demand, reimburse Landlord for all costs and expenses incurred by Landlord in connection with such sublease, including reviewing any plans and specifications for Alterations proposed to be made in connection therewith, and all legal fees and expenses incurred by Landlord; (vi) the proposed sublease shall comply with all of the requirements of this Lease, including Section 16.4 hereof, excepting only the obligations of Tenant pursuant to Section 16.7; and (vii) notwithstanding any such sublease, Tenant shall remain fully and primarily liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant shall be deemed a default by Tenant hereunder. (c) Notwithstanding the foregoing, provided that no Event of Default has occurred hereunder, upon not less than 30 days prior notice to Landlord, Tenant may sublet not more than 3,000 rentable square feet of the Premises for use as a private hair salon (i.e. not open to the public and providing goods and services only to Tenant's members), provided that each and every one of the following conditions are -35- 40 fully and completely satisfied: (i) said private hair salon facility shall be operated in a first-class fashion and manner not materially different from the hair salon operated on the date of this Lease in the Reebok Sports Club facility referred to in Section 36.2(c); (ii) the Premises continue to be operated a first-class health club/sports club facility in accordance with the requirements of this Lease; (iii) the subleased portion of the Premises shall be operated and maintained in a first-class condition, in accordance with the requirements of this Lease and the then-standards of the Building and the Center; (iv) the proposed subtenant has, in Landlord's reasonable judgment, sufficient financial means to perform all of its obligations under the sublease; (v) Tenant shall, upon demand, reimburse Landlord for all costs and expenses incurred by Landlord in connection with such sublease, including reviewing any plans and specifications for Alterations proposed to be made in connection therewith, and all legal fees and expenses incurred by Landlord; (vi) the proposed sublease shall comply with all of the requirements of this Lease, including Section 16.4 hereof, excepting only the obligations of Tenant pursuant to Section 16.7; and (vii) notwithstanding any such sublease, Tenant shall remain fully and primarily liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant shall be deemed a default by Tenant hereunder. (d) Notwithstanding the foregoing, provided that no Event of Default has occurred hereunder, upon not less than 30 days prior notice to Landlord, Tenant may sublet not more than 3,000 rentable square feet of the Premises for use as a private sports medicine facility (i.e. not open to the public and providing services only to Tenant's members), provided that each and every one of the following conditions are fully and completely satisfied: (i) said private sports medicine facility shall be operated in a first-class fashion and manner not materially different from the sports medicine facility operated on the date of this Lease in the Reebok Sports Club facility referred to in Section 36.2(c); (ii) the Premises continue to be operated a first-class health club/sports club facility in accordance with the requirements of this Lease; (iii) the subleased portion of the Premises shall be operated and maintained in a first-class condition, in accordance with the requirements of this Lease and the then-standards of the Building and the Center; (iv) the proposed subtenant has, in Landlord's reasonable judgment, sufficient financial means to perform all of its obligations under the sublease; (v) Tenant shall, upon demand, reimburse Landlord for all costs and expenses incurred by Landlord in connection with such sublease, including reviewing any plans and specifications for Alterations proposed to be made in connection therewith, and all legal fees and expenses incurred by Landlord; (vi) the proposed sublease shall comply with all of the requirements of this Lease, including Section 16.4 hereof, excepting only the obligations of Tenant pursuant to Section 16.7; and (vii) notwithstanding any such sublease, Tenant shall remain fully liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant shall be deemed a default by Tenant hereunder. (e) Notwithstanding the foregoing, provided that no Event of Default has occurred hereunder, upon not less than 30 days prior notice, Tenant may sublet not more than 2,500 rentable square feet of the Premises for use as a private clothing boutique (i.e. not open to the public and providing goods and services only to Tenant's members), provided that each and every one of the following conditions are fully and completely satisfied: (i) said private clothing boutique shall be operated in a first-class fashion and manner not materially different from the clothing boutique operated on the date of this Lease in the Reebok Sports Club facility referred to in Section 36.2(c); (ii) the Premises continue to be operated a first-class health club/sports club facility in accordance with the requirements of this Lease; (iii) the subleased portion of the Premises shall be operated and maintained in a first-class condition, in accordance with the requirements of this Lease and the then-standards of the Building and the Center; (iv) the proposed subtenant has, in Landlord's reasonable judgment, sufficient financial means to perform all of its obligations under the sublease; (v) Tenant shall, upon demand, reimburse Landlord for all costs and expenses incurred by Landlord in connection with such sublease, including reviewing any plans and specifications for Alterations proposed to be made in connection therewith, and all legal fees and expenses incurred by Landlord; (vi) the proposed sublease shall comply with all of the requirements of this Lease, including Section 16.4 hereof, excepting only the obligations of Tenant pursuant to Section 16.7; and (vii) notwithstanding any such sublease, Tenant shall remain fully and primarily liable for the payment of all Rent due and for the performance of all other terms, covenants and conditions contained in -36- 41 this Lease on Tenant's part to be observed and performed, and any default under any term, covenant or condition of this Lease by any subtenant shall be deemed a default by Tenant hereunder. ARTICLE 17 ELECTRICITY Section 17.1 SUBMETERED ELECTRICITY. Subject to the provisions of this Article 17, Landlord shall redistribute or furnish electricity to or for the use of Tenant in the Premises for the operation of Tenant's electrical systems and equipment in the Premises, at a level sufficient to accommodate a demand load of 4 watts per usable square foot of area in the Premises (the "Permitted Capacity"). Subject to the last sentence of this Section 17.1, Tenant shall pay to Landlord, on demand from time to time but no more frequently than monthly, for its consumption of electricity at the Premises, a sum equal to 103% of the product obtained by multiplying (i) the Cost Per Kilowatt Hour, by (ii) the actual number of kilowatt hours of electric current consumed by Tenant in such billing period. "Cost Per Kilowatt Hour" means the total cost incurred by Landlord to provide electricity to the Center during a particular billing period, including energy charges, demand charges, surcharges, time-of-day charges, fuel adjustment charges, rate adjustment charges, taxes, rebates and any other factors used by the utility company in computing its charges to Landlord, divided by the total kilowatt hours purchased by Landlord to provide electricity to the Center during such period. If any tax is imposed upon Landlord's receipts from the sale or resale of electricity to Tenant, Tenant shall reimburse Landlord for such tax, if and to the extent permitted by law. Landlord shall install a submeter or submeters, at Tenant's expense, to measure Tenant's consumption of electricity in the Premises, which submeter shall be maintained by Landlord at Tenant's expense. Where more than one submeter measures Tenant's consumption of electricity in the Premises, the electricity measured by each submeter shall be computed and billed separately in accordance with the provisions set forth above. Bills for such amounts shall be rendered to Tenant at such times as Landlord may elect. For any period during which such submeter or submeters are not installed or are not operational in the Premises, the monthly Fixed Rent shall be increased by an amount equal to the product of (A) $.2083, subject to adjustment for any increases in electric rates or taxes, and (B) the number of rentable square feet in the Premises. Section 17.2 USE OF ELECTRICITY. Tenant shall at all times comply with the rules and regulations of the utility company supplying electricity to the Building. Tenant shall not use any electrical equipment which, in Landlord's judgment, would exceed the Permitted Capacity or interfere with electrical service to other tenants of the Building. Tenant shall not make or perform, or permit the making or performance of, any Alterations to wiring installations or other electrical facilities in or serving the Premises, or make any additions to the equipment or other appliances in the Premises which utilize electrical energy without the prior consent of Landlord, in each instance, and in compliance with this Lease. Section 17.3 SERVICE DISRUPTION. Landlord shall not be liable in any way to Tenant for any failure, defect or interruption of, or change in the supply, character and/or quantity of, electric service furnished to the Premises for any reason except if caused solely by the gross negligence or willful misconduct of Landlord, nor shall there be any allowance to Tenant for a diminution of rental value, nor shall the same constitute an actual or constructive eviction of Tenant, in whole or in part, or relieve Tenant from any of its Lease obligations (except as expressly and specifically permitted pursuant to Section 12.10 hereof), and no liability shall arise on the part of Landlord by reason of inconvenience, annoyance or injury to business, whether electricity is provided by public or private utility or by any electricity generation system owned and operated by Landlord. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises as a result of any such failure, defect or interruption of, or change in the supply, character and/or quantity of, electric service, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever. Section 17.4 DISCONTINUANCE OF SERVICE. Notwithstanding any provision to the contrary contained in this Article 17, Landlord reserves the right to discontinue furnishing electricity to Tenant in the Premises on not less than 30 days notice to Tenant; provided, that either (a) Landlord discontinues -37- 42 furnishing electricity to tenants (including Tenant) leasing, in the aggregate, not less than at least 50% of the rentable area of the Building, or (b) Landlord is required to discontinue furnishing electricity under applicable Requirements. If Landlord exercises such right, or is compelled to discontinue furnishing electricity to Tenant, then this Lease shall continue in full force and effect and shall be unaffected thereby, except that from and after the effective date of such discontinuance, Landlord shall not be obligated to furnish electricity to Tenant hereunder. If Landlord so discontinues furnishing electricity, then Tenant shall arrange to obtain electricity directly from any utility company or other electricity provider serving the Premises to the extent available, suitable and safe for such purposes. All equipment which may be required to obtain electricity of substantially the same quantity, quality and character shall be installed by Landlord, at the sole cost and expense of (i) Landlord, if Landlord voluntarily discontinues such service, or (ii) Tenant, if (A) Landlord is compelled to discontinue such service by the utility company or pursuant to applicable Requirements, or (B) such discontinuance arises out of the acts or omissions of Tenant. Landlord will not voluntarily discontinue furnishing electricity to Tenant until Tenant is able to receive electricity directly from the utility company or other company servicing the Building, unless the utility company or other company is not prepared to furnish electricity to the Premises on the date required as a result of Tenant's delay or negligence in arranging for service, Tenant's refusal to provide the utility company or other company with a deposit or other security requested by the utility company, or Tenant's refusal to take any other action requested by the utility company or other company. Tenant shall pay all costs and expenses for all electricity consumed on the Premises during the Term, including all amounts payable directly to the electricity provider pursuant to this Section 17.4. ARTICLE 18 ACCESS TO PREMISES Section 18.1 LANDLORD'S ACCESS. (a) Tenant shall permit Landlord, Landlord's agents, utility companies and other service providers servicing the Building to erect, use, maintain, repair and replace concealed ducts, pipes, lines and conduits in and through the Premises, provided such use does not cause the usable area of the Premises to be reduced beyond a de minimis amount. Landlord shall promptly repair any damage to the Premises or Tenant's Property caused by any work performed pursuant to this Article. (b) Landlord, any Lessor or Mortgagee and any other party designated by Landlord and their respective agents shall have the right to enter the Premises at all reasonable times, upon reasonable notice (which notice may be oral) except in the case of emergency, (i) to examine the Premises, (ii) to show the Premises to prospective purchasers, Mortgagees or Lessors of the Building and their respective agents and representatives or others, and, during the last 12 months of the Term, to prospective lessees of premises in the Center, and (iii) to make such repairs, alterations or additions to the Premises or the Building (A) as Landlord may deem necessary or desirable, (B) which Landlord may elect to perform following Tenant's failure to perform, or (C) to comply with any Requirements, and Landlord shall be allowed to take all material into the Premises that may be required for the performance of such work without the same constituting an actual or constructive eviction of Tenant in whole or in part and without any abatement of Rent. (c) All parts (except surfaces facing the interior of the Premises) of all walls, windows and doors bounding the Premises, including exterior Building walls, exterior core corridor walls, and doors and entrances (other than doors and entrances solely connecting areas within the Premises), all balconies, terraces and roofs adjacent to the Premises, all space in or adjacent to the Premises used for shafts, stacks, risers, fan rooms, electrical and communications closets, stairways, mail chutes, conduits and other mechanical facilities, Building Systems and Building facilities are not part of the Premises, and Landlord shall have the use thereof and access thereto through the Premises for the purposes of Building operation, maintenance, alteration and repair. Section 18.2 ALTERATIONS TO BUILDING AND CENTER. Landlord has the right at any time or from time-to-time, in its sole discretion, to (i) change the name, number or designation by which the Building or Center is commonly known, or (ii) alter the Building to change the arrangement or location of entrances or -38- 43 passageways, doors and doorways, and corridors, elevators, stairs, toilets, or other public parts of the Building, or (iii) build, add to, subtract from, relocate, alter, change or otherwise use the Center or any part thereof, or any buildings, structures, or other areas or facilities therein or thereon, without any such acts constituting an actual or constructive eviction and without incurring any liability to Tenant, so long as such changes do not deny Tenant reasonable access to the Premises. Landlord shall use reasonable efforts to minimize interference with Tenant's use and occupancy of the Premises during the making of such changes or alterations, provided that Landlord shall have no obligation to employ contractors or labor at overtime or other premium pay rates or to incur any other overtime costs or additional expenses whatsoever. ARTICLE 19 DEFAULT Section 19.1 TENANT'S DEFAULTS. Each of the following events shall be an "Event of Default" hereunder: (a) Tenant fails to pay when due any installment of Fixed Rent or Additional Rent and such default continues for 5 days after Landlord's notice of such default is given to Tenant; provided, however, that if Tenant shall default in the timely payment of Fixed Rent or Additional Rent 2 times in any period of 12 months, then, notwithstanding that such defaults shall have each been cured within the applicable period provided above, upon any further default in the timely payment of Fixed Rent or Additional Rent, Landlord may serve a 3 days' notice of termination upon Tenant without affording to Tenant an opportunity to cure such further default; or (b) Tenant defaults in observing or performing the provisions of Section 3.1(a), and such default continues for 24 hours after notice; or (c) if Landlord applies or retains any part of the Security Deposit, and Tenant fails to deposit with Landlord the amount so applied or retained by Landlord, or to provide Landlord with a replacement Letter of Credit (as defined in Section 34.2), if applicable, within 5 days after notice by Landlord to Tenant stating the amount applied or retained; or (d) Tenant defaults in the observance or performance of any other term, covenant or condition of this Lease to be observed or performed by Tenant and such default continues for more than 15 days after notice by Landlord to Tenant of such default; or if such default is of such a nature that it can be remedied but cannot be completely remedied within 15 days, Tenant fails to commence to remedy such default within 15 days after such notice; or, with respect to any such default, Tenant, having commenced such remedy within 15 days after such notice, fails to diligently prosecute to completion all steps necessary to remedy such default, or Tenant fails to complete such remedy within 90 days; or (e) Tenant defaults in the observance or performance of any term, covenant or condition on Tenant's part to be observed or performed under any other lease with Landlord or Landlord's predecessor-in-interest for space in the Center, and such default shall continue beyond any grace period set forth in such other lease for the remedying of such default; or (f) Tenant's interest in this Lease shall devolve upon or pass to any Person, whether by operation of law or otherwise, except as expressly permitted under Article 16 hereof; or (g) Tenant generally does not, or is unable to, or admits in writing its inability to, pay its debts as they become due; or (h) Tenant files a voluntary petition in bankruptcy or insolvency, or is adjudicated a bankrupt or insolvent, or files any petition or answer seeking any reorganization, liquidation, dissolution or similar relief under any present or future federal bankruptcy act or any other present -39- 44 or future applicable federal, state or other statute or law, or makes an assignment for the benefit of creditors or seeks or consents to or acquiesces in the appointment of any trustee, receiver, liquidator or other similar official for Tenant or for all or any part of Tenant's property; or (i) if, within 60 days after the commencement of any proceeding against Tenant, whether by the filing of a petition or otherwise, seeking bankruptcy, insolvency, reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy act or any other present or future applicable federal, state or other statute or law, such proceeding shall not have been dismissed, or if, within 60 days after the appointment of any trustee, receiver, liquidator or other similar official for Tenant, or for all or any part of Tenant's property, without the consent or acquiescence of Tenant, such appointment shall not have been vacated or otherwise discharged, or if any lien, execution or attachment or other similar filing shall be made or issued against Tenant or any of Tenant's property pursuant to which the Premises shall be taken or occupied or attempted to be taken or occupied by someone other than Tenant; or (j) Excepting only those days on which Tenant is prevented from remaining open by virtue of strike, fire, unavoidable casualty or other event beyond the control of Tenant, but financial inability shall never be deemed to be an event beyond Tenant's control (and Tenant agrees promptly to advise Landlord of any such event and closing, and further agrees to reopen as soon thereafter as possible), failure of Tenant, after the Term commences, to be open for business to the public for more than one day when required by this Lease to be so open in any one calendar year, or for more than an aggregate of 3 such days during the Term hereof, or if Tenant shall otherwise abandon or vacate the Premises. Without limitation, the failure of Tenant to have completed its Initial Installations and equipped the Premises and to have opened for business on the Rent Commencement Date or the closing of the Premises for business after Tenant has initially opened for business therein, if such failure or closing continues for more than 3 consecutive days on which Tenant is required pursuant to applicable provisions of this Lease to keep the Premises open for business, shall be considered for the purposes hereof to be an abandonment of the Premises by Tenant. Upon the occurrence of any one or more of such Events of Default, Landlord may, at its sole option, give to Tenant 3 days' notice of cancellation of this Lease, in which event this Lease and the Term shall come to an end and expire (whether or not the Term shall have commenced) upon the expiration of such 3 day period with the same force and effect as if the date set forth in the notice was the Expiration Date stated herein; and Tenant shall then quit and surrender the Premises to Landlord, but Tenant shall remain liable for damages as provided in Article 20 hereof. Section 19.2 TENANT'S LIABILITY. If, at any time, (i) Tenant shall be comprised of two or more Persons, (ii) Tenant's obligations under this Lease shall have been guaranteed by any Person other than Tenant, or (iii) Tenant's interest in this Lease shall have been assigned, the word "Tenant," as used in Sections 19.1(g) (h) and (i), shall be deemed to mean any one or more of the Persons primarily or secondarily liable for Tenant's obligations under this Lease. Any monies received by Landlord from or on behalf of Tenant during the pendency of any proceeding of the types referred to in this Article shall be deemed paid as compensation for the use and occupancy of the Premises and the acceptance of any such compensation by Landlord shall not be deemed an acceptance of Rent or a waiver on the part of Landlord of any rights under this Lease. This Lease and the obligations of Tenant to pay Rent and to perform all of the other covenants and agreements of Tenant hereunder shall not be affected, impaired or excused by any Unavoidable Delays, excepting only as expressly and specifically set forth in Section 19.1(j) hereof. -40- 45 ARTICLE 20 REMEDIES AND DAMAGES Section 20.1 (a) LANDLORD'S REMEDIES. If any Event of Default occurs, and this Lease terminates as provided in Article 19: (i) SURRENDER OF POSSESSION. Tenant shall quit and surrender the Premises to Landlord, and Landlord and its agents may immediately, or at any time after such Event of Default, re-enter the Premises or any part thereof, without notice, either by summary proceedings, or by any other applicable action or proceeding, or by force (to the extent permitted by law) or otherwise in accordance with applicable legal proceedings (without being liable to indictment, prosecution or damages therefor), and may repossess the Premises and dispossess Tenant and any other Persons from the Premises and remove any and all of their property and effects from the Premises. (ii) LANDLORD'S RELETTING. Landlord, at Landlord's option, may relet all or any part of the Premises from time to time, either in the name of Landlord or otherwise, to such tenant or tenants, for any term ending before, on or after the Expiration Date, at such rental and upon such other conditions (which may include concessions and free rent periods) as Landlord, in its sole discretion, may determine. Landlord shall have no obligation to and shall not be liable for refusal or failure to relet or, in the event of any such reletting, for refusal or failure to collect any rent due upon any such reletting; and no such refusal or failure shall relieve Tenant of, or otherwise affect, any liability under this Lease. Landlord, at Landlord's option, may make such alterations, decorations and other physical changes in and to the Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with such reletting or proposed reletting, without relieving Tenant of any liability under this Lease or otherwise affecting any such liability. (b) OTHER REMEDIES. Upon the breach or threatened breach by Tenant, or any Persons claiming through or under Tenant, of any term, covenant or condition of this Lease, Landlord shall have the right to enjoin such breach and to invoke any other remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies were not provided in this Lease for such breach. The rights to invoke the remedies set forth above are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in equity. (c) TENANT'S WAIVER. Tenant, on its own behalf and on behalf of all Persons claiming through or under Tenant, including all creditors, hereby waives all rights which Tenant and all such Persons might otherwise have under any Requirement (i) to the service of any notice of intention to re-enter or to institute legal proceedings, (ii) to redeem, or to re-enter or repossess the Premises, or (iii) to restore the operation of this Lease, after (A) Tenant shall have been dispossessed or ejected by judgment or by warrant of any court or judge, (B) any re-entry by Landlord, or (C) any expiration or early termination of the term of this Lease, whether such dispossession, re-entry, expiration or termination shall be by operation of law or pursuant to the provisions of this Lease. The words "re-enter," "re-entry" and "re-entered" as used in this Lease shall not be deemed to be restricted to their technical legal meanings. Section 20.2 (a) LANDLORD'S DAMAGES. If this Lease and the Term expires and comes to an end as provided in Article 19, or by or under any summary proceeding or any other action or proceeding, or if Landlord shall re-enter the Premises as provided in Section 20.1, then, in any of such events: (i) Tenant shall pay to Landlord all Rent payable under this Lease by Tenant to Landlord up to the Expiration Date or to the date of re-entry upon the Premises by Landlord, as the case may be; (ii) Landlord shall be entitled to retain all monies, if any, paid by Tenant to Landlord, whether as prepaid Rent, the Security Deposit or otherwise, and to draw upon any Letter of Credit or other security deposited by Tenant hereunder and retain the proceeds thereof, which monies, -41- 46 to the extent not otherwise applied to amounts due and owing to Landlord, shall be credited by Landlord against any damages payable by Tenant to Landlord; (iii) Tenant shall pay to Landlord, in monthly installments, on the days specified in this Lease for payment of installments of Fixed Rent, any Deficiency; it being understood that Landlord shall be entitled to recover the Deficiency from Tenant each month as the same shall arise, and no suit to collect the amount of the Deficiency for any month shall prejudice Landlord's right to collect the Deficiency for any subsequent month by a similar proceeding; and (iv) whether or not Landlord shall have collected any monthly payments on account of the Deficiency, Tenant shall pay to Landlord, on demand, in lieu of any further payments on account of the Deficiency and as liquidated and agreed final damages, a sum equal to the amount by which the Rent for the period which otherwise would have constituted the unexpired portion of the Term (assuming Additional Rent during such period to be the same as had been payable for the year immediately preceding such termination or re-entry, increased in each succeeding year by 4% (on a compounded basis)) exceeds the then fair and reasonable rental value of the Premises, for the same period (with both amounts being discounted to present value at a rate of interest equal to 2% below the then Base Rate) less the aggregate amounts on account of the Deficiency theretofore collected by Landlord pursuant to the provisions of Section 20.2(a)(iii) for the same period. If, before presentation of proof of such liquidated damages to any court, commission or tribunal, Landlord shall have relet the Premises or any part thereof for the period which otherwise would have constituted the unexpired portion of the Term or any part thereof, the amount of rent reserved upon such reletting shall be deemed, prima facie, to be the fair and reasonable rental value for the part or the whole of the Premises so relet during the term of the reletting. (b) RELETTING. If the Premises, or any part thereof, shall be relet together with other space in the Building, the rents collected or reserved under any such reletting and the expenses of any such reletting shall be equitably apportioned for the purposes of this Section. Tenant shall not be entitled to any rents collected or payable under any reletting, whether or not such rents exceed Fixed Rent reserved in this Lease. Nothing contained in Articles 19 or 20 shall be deemed to limit or preclude the recovery by Landlord from Tenant of the maximum amount allowed to be obtained as damages under applicable Requirements, or of any sums or damages to which Landlord may be entitled in addition to the damages set forth in this Section. Section 20.3 DEFAULT INTEREST: OTHER RIGHTS OF LANDLORD. Any Rent or damages payable under this Lease and not paid when due shall bear interest at the Interest Rate from the due date until paid, and the interest shall be deemed Additional Rent. If Tenant fails to pay any Additional Rent when due, Landlord, in addition to any other right or remedy, shall have the same rights and remedies as in the case of a default by Tenant in the payment of Fixed Rent. If Tenant is in arrears in the payment of Rent, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to any items Landlord sees fit, regardless of any request by Tenant. Landlord reserves the right, without liability to Tenant and without constituting any claim of constructive eviction, to suspend furnishing or rendering to Tenant any overtime Building services or labor, materials or other property or services for which Tenant is obligated to pay a separate charge under this Lease (excluding electricity, water and HVAC), in the event that (but only for so long as) Tenant is in arrears in paying Landlord for such items for more than 5 days after notice from Landlord to Tenant demanding the payment of such arrears. ARTICLE 21 LANDLORD'S RIGHT TO CURE: REIMBURSEMENT Section 21.1 LANDLORD'S RIGHT TO CURE. If Tenant defaults in the performance of any of its obligations under this Lease, Landlord, without thereby waiving such default, may perform such obligation for the account and at the expense of Tenant: (i) immediately or at any time thereafter, and without notice, -42- 47 in the case of emergency or in case the default (A) materially interferes with the use by any other tenant of any space in the Building, (B) materially interferes with the efficient operation of the Building, (C) will result in a violation of any Requirement, (D) will result in a default under any Mortgage or Superior Lease, or (E) will result in a cancellation of any insurance policy maintained by Landlord, and (ii) in any other case if such default continues after more than 10 days from the date Landlord gives notice of Landlord's intention so to perform the defaulted obligation. All costs and expenses incurred by Landlord in connection with any such performance by it for the account of Tenant and all costs and expenses, including reasonable counsel fees and disbursements, incurred by Landlord in any action or proceeding (including any summary dispossess proceeding) brought by Landlord to enforce any obligation of Tenant under this Lease and/or right of Landlord in or to the Premises, shall be paid by Tenant to Landlord on demand, with interest thereon at the Interest Rate from the date incurred by Landlord. Except as expressly provided to the contrary in this Lease, all costs and expenses which, pursuant to this Lease (including the Rules and Regulations) are incurred by Landlord and payable to Landlord by Tenant, and all charges, amounts and sums payable to Landlord by Tenant for any property, material, labor, utility or other services which, pursuant to this Lease or at the request and for the account of Tenant, are provided, furnished or rendered by Landlord, shall become due and payable by Tenant to Landlord in accordance with the terms of the bills rendered by Landlord to Tenant. Section 21.2 REIMBURSEMENT FOR TENANT'S DEFAULT. Tenant shall reimburse Landlord, within 5 days after demand, for all expenditures made by, or damages, costs or fines sustained or incurred by, Landlord due to any default by Tenant under this Lease, with interest thereon at the Interest Rate, from the date such expenditures were made, or damages, costs or fines incurred, until the date reimbursed by Tenant. ARTICLE 22 NO REPRESENTATIONS BY LANDLORD; LANDLORD'S APPROVAL Section 22.1 NO REPRESENTATIONS. Except as expressly set forth herein, Landlord and Landlord's agents have made no warranties, representations, statements or promises with respect to (i) the rentable and usable areas of the Premises, the Building or the Center, (ii) the amount of any current or future Operating Expenses or Taxes, (iii) the compliance with applicable Requirements of the Premises, the Building or the Center, or (iv) the suitability of the Premises for any particular use or purpose. No rights, easements or licenses are acquired by Tenant under this Lease, by implication or otherwise. Tenant is entering into this Lease after full investigation, and is not relying upon any statement or representation made by Landlord not embodied in this Lease. Section 22.2 WRITTEN APPROVAL. All references in this Lease to the consent or approval of Landlord mean the written consent or approval of Landlord, duly executed by Landlord. All consents or approvals of Landlord may be granted or withheld in Landlord's sole discretion unless specifically provided to the contrary in this Lease. Section 22.3 NO MONEY DAMAGES. Wherever in this Lease Landlord's consent or approval is required, if Landlord refuses to grant such consent or approval, whether or not Landlord expressly agreed that such consent or approval would not be unreasonably withheld, Tenant shall not make, and Tenant hereby waives, any claim for money damages (including any claim by way of set-off, counterclaim or defense) based upon Tenant's claim or assertion that Landlord unreasonably withheld or delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce such provision, by specific performance, injunction or declaratory judgment. In no event shall Landlord be liable for, and Tenant, on behalf of itself and all other Tenant Parties, hereby waives any claim for, any indirect, consequential or punitive damages, including loss of profits or business opportunity, arising under or in connection with this Lease. -43- 48 ARTICLE 23 END OF TERM Section 23.1 EXPIRATION. Upon the expiration or other termination of this Lease, Tenant shall quit and surrender the Premises to Landlord, vacant, broom clean and in good order and condition, ordinary wear and tear and damage for which Tenant is not responsible under the terms of this Lease excepted, and Tenant shall remove all of Tenant's Property and Specialty Alterations as may be required pursuant to Article 5 of this Lease. Section 23.2 HOLDOVER RENT. Any holding over by Tenant after the expiration of the Term shall be treated as a tenancy at sufferance, at the Rent set forth below, and otherwise on the terms and conditions set forth in this Lease. Landlord and Tenant recognize that the damage to Landlord resulting from any failure by Tenant to timely surrender possession of the Premises may be substantial, may exceed the amount of the Rent theretofore payable hereunder, and will be impossible to accurately measure. Tenant therefore agrees that if possession of the Premises is not surrendered to Landlord on or before the Expiration Date or sooner termination of the Term, in addition to any other rights or remedies Landlord may have hereunder or at law, Tenant shall: (a) pay to Landlord for each month (or any portion thereof) during which Tenant holds over in the Premises after the Expiration Date or sooner termination of the Term, a sum equal to the greater of (i) 2 times the Rent payable under this Lease for the last full calendar month of the Term, or (ii) 1.5 times the fair market rental value of the Premises for such month (as reasonably determined by Landlord); (b) be liable to Landlord for (i) any payment or rent concession which Landlord may be required to make to any tenant obtained by Landlord for all or any part of the Premises (a "New Tenant") in order to induce such New Tenant not to terminate its lease by reason of the holding-over by Tenant, and (ii) the loss of the benefit of the bargain if any New Tenant shall terminate its lease by reason of the holding-over by Tenant; and (c) indemnify and hold harmless Landlord against all claims for damages by any New Tenant. No holding-over by Tenant, nor the payment to Landlord of the amounts specified above, shall operate to extend the Term hereof. Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the Expiration Date or sooner termination of this Lease, and no acceptance by Landlord of payments from Tenant after the Expiration Date or sooner termination of the Term shall be deemed to be other than on account of the amount to be paid by Tenant in accordance with the provisions of this Article. Section 23.3 WAIVER OF STAY. Tenant expressly waives, for itself and for any Person claiming through or under Tenant, any rights which Tenant or any such Person may have under the provisions of Section 2201 of the New York Civil Practice Law and Rules and of any successor law of like import then in force, in connection with any holdover summary proceedings which Landlord may institute to enforce the foregoing provisions of this Article. ARTICLE 24 NO SURRENDER: NO WAIVER Section 24.1 NO SURRENDER OR RELEASE. No act or thing done by Landlord or Landlord's agents or employees during the Term shall be deemed an acceptance of a surrender of the Premises. Section 24.2 NO WAIVER. No provision of this Lease shall be deemed to have been waived by any party unless such waiver is in writing and is signed by the party against whom such waiver is -44- 49 asserted, and any such waiver shall be effective only for the specific purpose and in the specific instance in which given. The failure of either party to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease, or any of the Rules and Regulations, shall not be construed as a waiver or relinquishment for the future performance of such obligations of this Lease or the Rules and Regulations, or of the right to exercise such election but the same shall continue and remain in full force and effect with respect to any subsequent breach, act or omission. The receipt by Landlord of any Rent payable pursuant to this Lease or any other sums with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly Fixed Rent or Additional Rent herein stipulated shall be deemed to be other than a payment on account of the earliest stipulated Fixed Rent or Additional Rent, or as Landlord may elect to apply such payment, nor shall any endorsement or acceptance of any check or other payment in the face of a statement on such check or any letter accompanying such check or payment 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 Fixed Rent or Additional Rent or pursue any other remedy provided in this Lease. The existence of a right of renewal or extension of this Lease, or the exercise of such right, shall not limit Landlord's right to terminate this Lease in accordance with the terms hereof. ARTICLE 25 WAIVER OF TRIAL BY JURY Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either party against the other on any matters in any way arising out of or connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, or the enforcement of any remedy under any Requirement. If Landlord commences any summary proceeding against Tenant, Tenant will not interpose any counterclaim of any nature or description in any such proceeding (unless failure to impose such counterclaim would preclude Tenant from asserting in a separate action the claim which is the subject of such counterclaim), and will not seek to consolidate such proceeding with any other action which may have been or will be brought in any other court by Tenant. ARTICLE 26 ADJACENT EXCAVATION: SHORING If an excavation shall be made, or shall be authorized to be made, upon land adjacent to the Real Property, Tenant shall, upon notice, afford to the Person causing or authorized to cause such excavation a license to enter upon the Premises for the purpose of doing such work as such person shall deem necessary to preserve the Building or any other part of the Center from injury or damage and to support the Building or such part of the Center by proper foundations. In connection with such license, Tenant shall have no right to claim any damages or indemnity against Landlord, or diminution or abatement of Rent, provided that Tenant shall continue to have access to the Premises. ARTICLE 27 NOTICES Except as otherwise expressly provided in this Lease, all consents, notices, demands, requests, approvals or other communications given under this Lease shall be in writing and shall be deemed sufficiently given or rendered if delivered by hand (provided a signed receipt is obtained) or if sent by registered or certified mail (return receipt requested) or by a nationally recognized overnight delivery service making receipted deliveries, addressed as follows: if to Tenant, at Tenant's address set forth on the first page of this Lease, Attention: Mr. Michael Talla, or -45- 50 if to Landlord, at Landlord's address set forth on the first page of this Lease, Attention: Property Manager-630 Fifth Avenue, and with copies to (A) Office of the Center, 45 Rockefeller Plaza, New York, New York 10111, Attention: General Counsel, (B) Office of the Center, 45 Rockefeller Plaza, New York, New York 10111, Attention: Controller, (C) Tishman Speyer Properties, L.P., 520 Madison Avenue, New York, New York 10022, Attention: General Counsel, and (D) any Mortgagee or Lessor which shall have requested copies of notices, by notice given to Tenant in accordance with the provisions of this Article at the address designated by such Mortgagee or Lessor; or to such other addressees) as either Landlord or Tenant or any Mortgagee or Lessor may designate as its new addressees) for such purpose by notice given to the other in accordance with the provisions of this Article. Any such consent, notice, demand, request or other communication shall be deemed to have been given on the date of receipted delivery or refusal to accept delivery as provided in this Article 27, or the date delivery is first attempted but cannot be made due to a change of address of which no notice was given. ARTICLE 28 RULES AND REGULATIONS Tenant and all Tenant Parties shall observe and comply with the Rules and Regulations, as supplemented or amended from time to time, provided, that in case of any conflict or inconsistency between the provisions of this Lease and any of the Rules and Regulations as originally promulgated or as supplemented or amended from time to time, the provisions of this Lease shall control. Landlord reserves the right, from time to time, to adopt additional Rules and Regulations and to amend the Rules and Regulations then in effect. Nothing contained in this Lease shall impose upon Landlord any obligation to enforce the Rules and Regulations or terms, covenants or conditions in any other lease against any other Building tenant, and Landlord shall not be liable to Tenant for violation of the Rules and Regulations by any other tenant, its employees, agents, visitors or licensees, Landlord shall not enforce any Rule or Regulation against Tenant in a discriminatory fashion, except where differing circumstances justify different treatments. ARTICLE 29 PARTNERSHIP TENANT Section 29.1 PARTNERSHIP TENANT. If Tenant, or a permitted assignee of this Lease pursuant to Article 16, is a partnership, or is comprised of two or more Persons, individually or as partners of a partnership (any such partnership and such Persons are referred to in this Article 29 as "Partnership Tenant"), the following shall apply: (i) the liability of each of the general partners (excluding Persons solely holding interests as limited partners), each of the partners in a limited liability partnership or Persons comprising Partnership Tenant (the "Partners") shall be joint and several; (ii) each of the Partners hereby consents in advance to, and agrees to be bound by, any written instrument which may hereafter be executed by Partnership Tenant or any of the Partners, which shall modify, extend or discharge this Lease, in whole or in part, or surrender all or any part of the Premises to Landlord; (iii) any bills, statements, notices, demands, requests or other communications given or rendered to Partnership Tenant or to any of the Partners shall be binding upon Partnership Tenant and all of the Partners; (iv) if Partnership Tenant shall admit new Partners, all new Partners shall, by their admission to Partnership Tenant, be deemed to have assumed joint and several liability for the performance of all of the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed; (v) Partnership Tenant shall give prompt notice to Landlord of the admission of any new Partners, and upon demand of Landlord, shall cause each new Partner to execute and deliver to Landlord an agreement in form and substance satisfactory to Landlord, wherein each new Partner shall assume joint and several liability for the performance of all the terms, covenants and conditions of this Lease on Tenant's part to be observed and performed (but neither Landlord's failure to request any such agreement nor the failure of any new Partner to execute or deliver any such agreement to Landlord shall vitiate the provisions of this Section -46- 51 29.1); and (vi) no change in the Partners of Partnership Tenant resulting from the admission of a new Partner, or the death, retirement or withdrawal of a Partner shall release Partnership Tenant or any Partner or former Partner from their obligations under this Lease. Section 29.2 CHANGE OF PARTNERS. If Tenant is a Partnership Tenant, (i) the admission of new Partners, the withdrawal (in the ordinary course of business), retirement, death, incompetency or bankruptcy of any Partner, or the reallocation of partnership interests among the Partners shall constitute an assignment of this Lease unless Partners holding in the aggregate not less than 80% of the partnership interests in Partnership Tenant immediately prior to such event remain as Partners holding not less than 80% of the partnership interests in Partnership Tenant during the 12 month period immediately following such event (i.e., the transfer, by any of the foregoing means, of more than 20% of the partnership interests in Partnership Tenant in any consecutive 12 month period shall constitute an assignment of this Lease subject to the provisions of Article 16), and (ii) the reorganization of Partnership Tenant into a professional corporation or a limited liability partnership, or the reorganization of Tenant from a professional corporation or a limited liability partnership into a partnership, shall constitute an assignment of this Lease, unless immediately following such reorganization the Partners or shareholders, as the case may be, of Tenant shall be the same as those existing immediately prior to such reorganization, and shall acknowledge in writing to Landlord that they shall remain fully liable, jointly and severally, under this Lease as provided in this Article 29. If Tenant shall become a professional corporation, each individual shareholder, shareholder-employee, new individual shareholder and new shareholder-employee of any professional corporation which is a shareholder in Tenant shall have the same personal liability (if any) as such individual or shareholder-employee would have under this Lease if Tenant were a partnership and such individual or shareholder-employee were a Partner or admitted as a new Partner. If any individual Partner in Tenant is or becomes a shareholder-employee of a professional corporation, such individual shall have the same personal liability under this Lease as such individual would have if he and not the professional corporation were a Partner of Tenant. If Tenant shall become a limited liability partnership, (A) each Partner therein shall continue to have the same personal liability as such Partner had under this Lease prior to Tenant becoming a limited liability partnership, and (B) each new partner admitted to such limited liability partnership shall be bound by the provisions of Section 29.1, and shall execute and deliver to Landlord the assumption agreement required pursuant to Section 29.1(v) hereof. ARTICLE 30 VAULT SPACE Notwithstanding anything contained in this Lease or indicated on any sketch, blueprint or plan, no vaults, vault space or other space outside the boundaries of the Real Property are included in the Premises. Landlord makes no representation as to the location of the boundaries of the Real Property. All vaults and vault space and all other space outside the boundaries of the Real Property which Tenant may be permitted to use or occupy are to be used or occupied under a revocable license. If any such license shall be revoked, or if the amount of such space shall be diminished as required by any Governmental Authority or by any public utility company, such revocation, diminution or requisition shall not (i) constitute an actual or constructive eviction, in whole or in part, (ii) entitle Tenant to any abatement or diminution of Rent, (iii) relieve Tenant from any of its obligations under this Lease, or (iv) impose any liability upon Landlord. Any fee, tax or charge imposed by any Governmental Authority for any such vaults, vault space or other space occupied by Tenant shall be paid by Tenant. ARTICLE 31 LANDLORD'S AGENT Section 31.1 BROKERS. Landlord has retained Landlord's Agent as leasing agent in connection with this Lease and Landlord shall be solely responsible for any fee that may be payable to Landlord's Agent pursuant to a separate agreement. Each of Landlord and Tenant represents and warrants to the other that it has not dealt with any other brokers in connection with this Lease other than Landlord's Agent -47- 52 and Tenant's Agent and that to the best of its knowledge and belief, no other broker, finder or like entity procured or negotiated this Lease or is entitled to any fee or commission in connection herewith. Each of Landlord and Tenant shall indemnify, defend, protect and hold the other party harmless from and against any and all Losses which the indemnified party may incur by reason of any claim of or liability to any broker, finder or like agent (other than Landlord's Agent and Tenant's Agent) arising out of any dealings claimed to have occurred between the indemnifying party and the claimant in connection with this Lease, or the above representation being false. Section 31.2 AGENT. Unless Landlord shall render notice to Tenant to the contrary, Tishman Speyer Properties, L.P. is authorized to act as Landlord's agent in connection with the performance of this Lease, and Tenant shall direct all correspondence and requests to, and shall be entitled to rely upon correspondence received from, Tishman Speyer Properties, L.P., as agent for Landlord in accordance with Article 27. Tenant acknowledges that Tishman Speyer Properties, L.P. is acting solely as agent for Landlord in connection with the foregoing; and neither Tishman Speyer Properties, L.P. nor any of its direct or indirect partners, officers, shareholders, directors, employees, principals, agents or representatives shall have any liability to Tenant in connection with this Lease, and Tenant waives any and all claims against any and all of such parties arising out of, or in any way connected with, this Lease, the Building or the Center. ARTICLE 32 INDEMNITY Section 32.1 (a) TENANT'S INDEMNITY. Tenant shall not do or permit to be done any act or thing upon the Premises, the Building or the Center which may subject Landlord to any liability or responsibility for injury, damages to persons or property or to any liability by reason of any violation of any Requirement, and shall exercise such control over the Premises as to fully protect the Indemnitees against any such liability. Tenant shall indemnify, defend, protect and hold harmless each of the Indemnitees from and against any and all Losses to which any Indemnitee may (except to the extent arising from the gross negligence or willful misconduct of any such Indemnitee in the operation and maintenance of the Building) be subject or suffer, whether by reason of, or by reason of any claim for, any injury to, or death of, any person or persons or damage to property (including any loss of use thereof) or otherwise arising from or in connection with the use of, or from any work or thing whatsoever done in, any part of the Premises (other than by such Indemnitee) or by any Tenant Party in the Center, during the Term or during the period of time, if any, prior to the commencement or following the expiration of the Term that any Tenant Party may have been given access to any portion of the Premises for the purpose of performing work or otherwise, or as a result of any Tenant Party performing any such work or otherwise that subjects any Indemnitee to any Requirement to which such Indemnitee would not otherwise be subject, or arising from any condition of the Premises due to or resulting from any default by Tenant in the keeping, observance or performance of any provision contained in this Lease or from any act or negligence of any Tenant Party. (b) LANDLORD'S INDEMNITY. Landlord shall indemnify, defend and hold Tenant harmless from and against all losses incurred by Tenant (except insofar as it arises out of the negligence or willful misconduct of Tenant or any Tenant Party) arising from any accident, injury or damage whatsoever caused to any person or the property of any person in or about the common or public areas of the Building (specifically excluding the Premises), to the extent attributable to the gross negligence or willful misconduct of Landlord or its agents or employees. (c) INDEMNITY INCLUSIONS. As used in this Lease, the term "Losses" means any and all losses, liabilities, damages, claims, judgments, fines, suits, demands, costs, interest and expenses of any kind or nature (including reasonable attorneys' fees and disbursements) incurred in connection with any claim, proceeding or judgment and the defense thereof, and including all costs of repairing any damage to the Premises, the Building or the Center, or the appurtenances of any of the foregoing, to which a particular indemnity and hold harmless agreement applies. -48- 53 Section 32.2 DEFENSE AND SETTLEMENT. If any claim, action or proceeding is made or brought against any party entitled to indemnification hereunder, then, upon demand by the indemnified party, the indemnifying party, at its sole cost and expense, shall resist or defend such claim, action or proceeding in the indemnified party's name (if necessary), by attorneys approved by the indemnified party, which approval shall not be unreasonably withheld. Attorneys for the indemnifying party's insurer shall hereby be deemed approved for purposes of this Section 32.2. Notwithstanding the foregoing, an indemnified party may retain its own attorneys to participate or assist in defending any claim, action or proceeding involving potential liability of $5,000,000 or more, provided that the indemnifying party shall control the defense and the indemnifying party shall pay the reasonable fees and disbursements of such attorneys. Notwithstanding anything herein contained to the contrary, the indemnifying party may direct the indemnified party to settle any claim, suit or other proceeding provided that (i) such settlement shall involve no obligation on the part of the indemnified party other -49- 54 than the payment of money, (ii) any payments to be made pursuant to such settlement shall be paid in full exclusively by the indemnifying party at the time such settlement is reached, (iii) such settlement shall not require the indemnified party to admit any liability or wrongdoing, and (iv) the indemnified party shall have received an unconditional release from the other parties to such claim, suit or other proceeding. ARTICLE 33 TAX STATUS OF BENEFICIAL OWNERS Tenant recognizes and acknowledges that Landlord and/or certain beneficial owners of Landlord may from time to time qualify as real estate investment trusts pursuant to Sections 856 et seq. of the Code or as entities described in Section 511(a)(2) of the Code, and that avoiding (i) the loss of such status, (ii) the receipt of any income derived under any provision of this Lease that does not constitute "rents from real property" (in the case of real estate investment trusts) or that constitutes "unrelated business taxable income" (in the case of entities described in Section 511(a)(2) of the Code), and (iii) the imposition of penalty or similar taxes (each, an "Adverse Event") is of material concern to Landlord and such beneficial owners and Tenant's agreement herein contained regarding the avoidance of an Adverse Event is a material inducement to Landlord entering into this Lease. In the event that this Lease or any document contemplated hereby could, in the opinion of counsel to Landlord, result in or cause an Adverse Event, Tenant agrees to cooperate with Landlord in amending or modifying this Lease or such documents and shall at the request of Landlord execute and deliver such documents reasonably required to effect such amendment or modification. Any amendment or modification pursuant to this Article 33 shall be structured so that the economic results to Landlord and Tenant shall be substantially similar to those set forth in this Lease without regard to such amendment or modification. Without limiting any of Landlord's other rights under this Article 33, Landlord may waive the receipt of any amount payable to Landlord under this Lease, and such waiver shall constitute an amendment or modification of this Lease with respect to such payment. ARTICLE 34 SECURITY DEPOSIT Section 34.1 SECURITY DEPOSIT. Tenant shall deposit the Security Deposit with Landlord upon the execution of this Lease in cash as security for the faithful performance and observance by Tenant of the terms, covenants and conditions of this Lease, including the surrender of possession of the Premises to Landlord as herein provided. Section 34.2 LETTER OF CREDIT. In lieu of a cash deposit, Tenant may deliver the Security Deposit to Landlord in the form of a clean, irrevocable, non-documentary and unconditional letter of credit in the amount of the Security Deposit (the "Letter of Credit"), in the form attached hereto as Exhibit I, issued by and drawable upon a commercial bank, trust company, national banking association or savings and loan association with offices for banking and drawing purposes in the City of New York (the "Issuing Bank"), which has outstanding unsecured, uninsured and unguaranteed indebtedness, or shall have issued a letter of credit or other credit facility that constitutes the primary security for any outstanding indebtedness (which is otherwise uninsured and unguaranteed), that is then rated, without regard to qualification of such rating by symbols such as `+' or "-" or numerical notation, "Aa" or better by Moody's Investors Service and "AA" or better by Standard & Poor's Ratings Service (and is not on credit-watch with negative implications), and has combined capital, surplus and undivided profits of not less than $500,000,000. The Letter of Credit shall (i) name Landlord as beneficiary, (ii) be in the amount of the Security Deposit, (iii) have a term of 1 year, (iv) permit multiple drawings, (v) be fully transferable by Landlord without the payment of any fees or charges, and (vi) otherwise be in form and content satisfactory to Landlord; provided, however, that Landlord shall in no event be obligated to accept a Letter of Credit for any amount less than $25,000. If upon any transfer of the Letter of Credit, any fees or charges shall be so imposed, then such fees or charges shall be payable solely by Tenant and the Letter of Credit shall so specify. The Letter of Credit shall provide that it shall be deemed automatically renewed, without amendment, for consecutive periods of 1 year each thereafter during the Term through the date that is at least 60 days after the Expiration Date, unless the Issuing Bank sends a notice (the "Non-Renewal Notice") to Landlord by certified mail, return receipt requested, not less than 30 days prior to the then- -50- 55 current expiration date of the Letter of Credit, stating that the Issuing Bank has elected not to renew the Letter of Credit. Unless Tenant delivers a replacement Letter of Credit which satisfies the conditions of this Article 34 within 10 days after Landlord receives a Non-Renewal Notice, then at any time after the expiration of such 10 day period Landlord shall have the right to draw the full amount of the Letter of Credit, by sight draft on the Issuing Bank, and shall thereafter hold or apply the cash proceeds of the Letter of Credit pursuant to the terms of this Article 34. The Letter of Credit shall state that drafts drawn under and in compliance with the terms of the Letter of Credit will be duly honored upon presentation to the Issuing Bank at an office location in New York City. The Letter of Credit shall be subject in all respects to the Uniform Customs and Practice for Documentary Credits (1993 revision), International Chamber of Commerce Publication No. 500. Section 34.3 APPLICATION OF SECURITY. If Tenant defaults in the payment or performance of any the terms, covenants or conditions of this Lease, including the payment of Rent, Landlord may use, apply or retain the whole or any part of the cash Security Deposit or may notify the Issuing Bank and thereupon receive all or a portion of the Security Deposit represented by the Letter of Credit, and use, apply, or retain the whole or any part of such proceeds, as the case may be, to the extent required for the payment of any Rent or any other sum as to which Tenant is in default, including (i) any sum which Landlord may expend or may be required to expend by reason of Tenant's default, and (ii) any damages or Deficiency to which Landlord is entitled pursuant to this Lease or applicable Requirements, whether such damages or Deficiency accrues -51- 56 before or after summary proceedings or other reentry by Landlord. If Landlord uses, applies or retains any part of the Security Deposit, Tenant, upon demand, shall deposit with Landlord the amount so applied or retained so that Landlord shall have the full Security Deposit on hand at all times during the Term. If Tenant shall fully and faithfully comply with all of the terms, covenants and conditions of this Lease, the Security Deposit (or so much thereof as remains, if any) shall be returned to Tenant after the Expiration Date and after delivery of possession of the Premises to Landlord in the manner required by this Lease. Tenant expressly agrees that Tenant shall have no right to apply any portion of the Security Deposit against any of Tenant's obligations to pay Rent hereunder. Section 34.4 TRANSFER. Upon a sale of the Building or the Real Property or a leasing of the Building, or any financing of Landlord's interest therein, Landlord shall have the right to transfer the Security Deposit or the Letter of Credit, as applicable, to the vendee, lessee or lender. With respect to the Letter of Credit, within 10 days after notice from Landlord of any such anticipated sale, leasing or financing, Tenant, at its sole cost, shall arrange for the transfer of the Letter of Credit to the new landlord or lender, as designated by Landlord in the foregoing notice, or to have the Letter of Credit reissued in the name of the new landlord or lender. From and after any such sale, financing or leasing, Tenant shall look solely to the new landlord or lender for the return of such Security Deposit or Letter of Credit and Landlord shall have no further liabilities or obligations in connection therewith. The provisions of this Section 34.4 shall apply to each and every transfer or assignment made of the Security Deposit to a new landlord or lender. Tenant will not assign, transfer, pledge or encumber, or attempt to assign, transfer, pledge or encumber, the Security Deposit or Letter of Credit, and neither Landlord nor its successors or assigns as the holders of the Security Deposit or the Letter of Credit shall be bound by any such actual or attempted assignment or encumbrance. Section 34.5 REPLACEMENT LETTER OF CREDIT. For purposes hereof, the "Letter of Credit Amount" shall be defined as follows: (i) during the period from the Commencement Date through the 4th anniversary of the Rent Commencement Date, the Letter of Credit Amount shall be Four Million and 00/100 Dollars ($4,000,000.00); (ii) during the period from the 4th anniversary of the Rent Commencement Date through the last day immediately preceding the 5th anniversary of the Rent Commencement Date, the Letter of Credit Amount shall be Three Million and 00/100 Dollars ($3,000,000.00); and (iii) during the period from the 5th anniversary of the Rent Commencement Date through the 6th anniversary of the Rent Commencement Date, the Letter of Credit Amount shall be Two Million and 00/100 Dollars ($2,000,000.00). Provided that no Event of Default has occurred hereunder, commencing with the 4th anniversary of the Rent Commencement Date, concurrent with the expiration of any of the foregoing periods, Tenant may elect to replace the Letter of Credit with a substitute Letter of Credit (the "Substitute Letter of Credit"), which Substitute Letter of Credit shall be in the amount of the Letter of Credit Amount which is applicable during the respective period, and shall in all respects comply with the provisions of this Article 34. Such Substitute Letter of Credit shall be delivered to Landlord on or before the date which is 30 days prior to the then-current expiration date of the Letter of Credit. Upon delivery of the Substitute Letter of Credit by Tenant, (i) the Substitute Letter of Credit shall be deemed to be the "Letter of Credit" for all purposes under this Lease, and (ii) the existing Letter of Credit shall be returned by Landlord to Tenant. In the event that Tenant fails timely to deliver to Landlord a Substitute Letter of Credit, then Landlord may elect, at any time thereafter, to draw down the then-outstanding Letter of Credit and to hold the proceeds thereof in accordance with the provisions of this Article 34. To the extent that Landlord has not previously drawn down the Letter of Credit or applied the proceeds thereof, and provided that no Event of Default has occurred under this Lease, then upon Tenant's request therefor, the amount of such proceeds in excess of the then-applicable Letter of Credit Amount shall be returned to Tenant by Landlord. To the extent that Landlord has not previously drawn upon any Letter of Credit held by Landlord, and provided that no Event of Default has occurred under this Lease, then after the sixth anniversary of the Rent Commencement Date, promptly after receipt of Tenant's request therefor, the then-outstanding Letter of Credit shall be returned to Tenant by Landlord. -52- 57 ARTICLE 35 MISCELLANEOUS Section 35.1 DELIVERY. The submission of this document for examination and negotiation does not constitute an offer to lease, or a reservation of, or option for, the Premises, and this Lease shall not be binding upon Landlord or Tenant unless and until Landlord shall have executed and delivered a fully executed copy of this Lease to Tenant. Section 35.2 TRANSFER OF REAL PROPERTY. Landlord's obligations under this Lease shall not be binding upon Landlord named herein after the sale, conveyance, assignment, transfer or lease of Landlord's interest (collectively, a "Transfer") by Landlord (or upon any subsequent landlord after the Transfer by such subsequent landlord) of its interest in the Building or the Real Property, as the case may be, and in the event of any such Transfer, Landlord (and any such subsequent landlord) shall be entirely freed and relieved of all covenants and obligations of Landlord hereunder, and the transferee of Landlord's interest (or that of such subsequent landlord) in the Building or the Real Property, as the case may be, shall be deemed to have assumed all obligations under this Lease. Section 35.3 LIMITATION ON LIABILITY. The liability of Landlord for Landlord's obligations under this Lease shall be limited to Landlord's interest from time to time in the Real Property and Tenant shall not look to any other property or assets of Landlord or the property or assets of any of the Indemnitees in seeking either to enforce Landlord's obligations under this Lease or to satisfy a judgment for Landlord's failure to perform such obligations; and none of the Indemnitees shall be personally liable for the performance of Landlord's obligations under this Lease. Section 35.4 RENT. Notwithstanding anything to the contrary contained in this Lease, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated Fixed Rent, Tenant's Tax Payment, Tenant's Operating Payment, Additional Rent or Rent, shall constitute rent for the purposes of Section 502(b)(6) of the United States Bankruptcy Code and other Requirements. Section 35.5 ENTIRE AGREEMENT. This Lease (including any Schedules and Exhibits referred to herein and all supplementary agreements provided for herein) contains the entire agreement between the parties and all prior negotiations and agreements are merged into this Lease. All of the Schedules and Exhibits attached hereto are incorporated in and made a part of this Lease, provided that, in the event of any inconsistency between the terms and provisions of this Lease and the terms and provisions of the Schedules and Exhibits hereto, the terms and provisions of this Lease shall control. All Article and Section references set forth herein shall, unless the context otherwise requires, be deemed references to the Articles and Sections of this Lease. Section 35.6 GOVERNING LAW. This Lease shall be governed in all respects by the laws of the State of New York. Section 35.7 PARTIAL UNENFORCEABILITY. If any provision of this Lease, or its application to any Person or circumstance, shall ever be held to be invalid or unenforceable, then in each such event the remainder of this Lease or the application of such provision to any other Person or any other circumstance (other than those as to which it shall be invalid or unenforceable) shall not be thereby affected, and each provision hereof shall remain valid and enforceable to the fullest extent permitted by law. Section 35.8 CONSENT TO JURISDICTION. (a) Tenant agrees that all disputes arising, directly or indirectly, out of or relating to this Lease, and all actions to enforce this Lease, shall be dealt with and adjudicated in the state courts of the State of New York or the federal courts for the Southern District of New York; and for that purpose Tenant expressly and irrevocably submits itself to the jurisdiction of such courts. Tenant agrees that so far as is permitted under applicable law, this consent to personal jurisdiction shall be self-operative and no further instrument or action, other than service of process in one of the manners specified in this Lease, or as otherwise permitted by law, shall be necessary in order to -53- 58 confer jurisdiction upon it in any such court. Tenant further agrees that judgment against it in any such action or proceeding shall be conclusive and, to the extent permitted by applicable law, may be enforced in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of its indebtedness. (b) To the extent that Tenant has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, Tenant irrevocably waives such immunity in respect of its obligations under this Lease. Section 35.9 SURVIVAL. All obligations and liabilities of Landlord or Tenant to the other which accrued before the expiration or other termination of this Lease, and all such obligations and liabilities which by their nature or under the circumstances can only be, or by the provisions of this Lease may be, performed after such expiration or other termination, shall survive the expiration or other termination of this Lease. Without limiting the generality of the foregoing, the rights and obligations of the parties with respect to any indemnity under this Lease, and with respect to Fixed Rent, Tenant's Tax Payment, Tenant's Operating Payment, Additional Rent, and any other amounts payable under this Lease, shall survive the expiration or other termination of this Lease. Section 35.10 ESTOPPELS. Within 7 days following request from Landlord, any Mortgagee or any Lessor, Tenant shall deliver to Landlord a statement executed and acknowledged by Tenant, in form satisfactory to Landlord, (i) stating the Commencement Date, the Rent Commencement Date and the Expiration Date, and that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications), (ii) setting forth the date to which Fixed Rent and any Additional Rent have been paid, together with the amount of monthly Fixed Rent, Tenant's Tax Payment and Tenant's Operating Payment then payable, (iii) stating whether or not, to the best of Tenant's knowledge, Landlord is in default under this Lease, and, if Tenant asserts that Landlord is in default, setting forth the specific nature of any such defaults, (iv) stating whether Landlord has failed to complete any work required to be performed by Landlord under this Lease, (v) stating whether there are any sums payable to Tenant by Landlord under this Lease, (vi) stating the amount of the Security Deposit, if any, under this Lease, (vii) stating whether there are any subleases affecting the Premises, (viii) stating the address of Tenant to which all notices and communications under this Lease shall be sent, and (ix) responding to any other matters reasonably requested by Landlord, such Mortgagee or such Lessor. Tenant acknowledges that any statement delivered pursuant to this Section 35.10 may be relied upon by any purchaser or owner of the Real Property or the Building, or all or any portion of Landlord's interest in the Real Property or the Building or under any Superior Lease, or by any Mortgagee or assignee thereof, or by any Lessor or assignee thereof. Section 35.11 CERTAIN RULES OF INTERPRETATION. For purposes of this Lease, whenever the words "include", "includes", or "including" are used, they shall be deemed to be followed by the words "without limitation", and, whenever the circumstances or the context requires, the singular shall be construed as the plural, the masculine shall be construed as the feminine and/or the neuter and vice versa. This Lease shall be interpreted and enforced without the aid of any canon, custom or rule of law requiring or suggesting construction against the party drafting or causing the drafting of the provision in question. Section 35.12 CAPTIONS. The captions and paragraph headings in this Lease are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope of this Lease or the intent of any provision hereof. Section 35.13 PARTIES BOUND. The terms, covenants, conditions and agreements contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided in this Lease, to their respective legal representatives, successors, and assigns. Each and every provision of this Lease to be performed by Tenant shall be construed to be both a covenant and a condition. -54- 59 Section 35.14 MEMORANDUM OF LEASE. This Lease shall not be recorded; however, at Landlord's request, Landlord and Tenant shall promptly execute, acknowledge and deliver a memorandum of this Lease in form suitable for recording, together with such customary New York City and New York State real property transfer tax forms and affidavits as are then required for the recording of such memoranda, and Landlord may thereupon record such memorandum. Upon the expiration or sooner termination of the Term, Tenant shall execute and deliver to Landlord such customary documents and instruments, in form suitable for recording, as Landlord shall reasonably request to evidence the termination of such memorandum of lease. Section 35.15 COUNTERPARTS. This Lease may be executed in duplicate counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument. ARTICLE 36 USE OF PREMISES Section 36.1 GENERAL STANDARDS. Tenant covenants and agrees that the Premises during the Term shall be used and occupied by Tenant only for the Permitted Uses and no other purpose or purposes. Without limitation, Tenant shall conduct its business in the Premises in a first-class, reputable manner, consistent with first-class health-club facilities operated from time to time in the borough of Manhattan. Section 36.2 SPECIFIC OPERATING COVENANTS. Tenant further covenants and agrees that it will, at its sole cost and expense: (a) Occupy and commence the operation of its business in each Portion of the Premises as soon after the respective delivery date of that Portion of the Premises as possible, but in no event later than the Rent Commencement Date occurs. (b) Excepting only on Christmas Day, New Years Day and Thanksgiving Day, keep the Premises open for business at least during the following (the "Operating Hours"): (i) Monday through Friday for 12 consecutive hours, and (ii) on Saturdays and Sundays for 8 consecutive hours, but in no event a greater number of hours than are permitted by applicable Requirements. (c) Throughout the Term, incident to the Permitted Uses, maintain and operate a cafe substantially similar to the cafe operation operated on the date of this Lease located in the facility known as "The Reebok Sports Club" located at 160 Columbus Avenue, New York, New York; provided, however, that said cafe shall be private (i.e. not open to the public and providing food only to Tenant's members). In addition, notwithstanding the foregoing or any other provisions of this Lease, Tenant shall not operate, or permit the operation of, a restaurant in the Premises. (d) Clean the windows and doors (including, in each case, the frames thereof) in the Premises and in the perimeter walls thereof whenever necessary, in Landlord's reasonable judgment. Tenant will not require, permit, suffer or allow any such window or door to be cleaned in violation of any applicable Requirements. (e) Keep the Premises clean; keep all toilets and locker rooms clean and sanitary; not permit garbage or waste materials to accumulate or become a nuisance; seal all refuse in plastic bags of adequate strength and size; maintain all garbage dumpsters in a clean and sanitary condition; remove all rubbish and other debris from the Premises to such location as may be specified by Landlord from time to time and under conditions approved by Landlord. (f) Keep all glass in the Premises and in the perimeter walls thereof, the frames for such glass, and any lettering and ornamentation on such glass insured against damage (including temporary repairs) for the benefit of Landlord for the full replacement value thereof. Such insurance shall -55- 60 be effected, at the option of Landlord, either by Tenant paying to Landlord a proportionate share of the premium incurred by Landlord for a blanket comprehensive glass policy for the Building or the Center, or by Tenant furnishing Landlord with a separate policy or policies for such glass insurance, in such form and placed with such underwriters as may be approved by Landlord. In the event Landlord elects to obtain such insurance, then upon Tenant's payment of its proportionate share of Landlord's blanket premium, Landlord will furnish Tenant with a certificate of such insurance. (g) Adequately staff the Premises with sufficient employees to conduct its business in a first-class, reputable manner. (h) Install blinds, curtains, shades or other window treatments on the windows and doors of the Premises. All such blinds, curtains, shades and window treatments (a) shall be subject to the prior written approval of Landlord in all respects, and (b) shall be kept closed and lowered at all times. (i) Not install or place any lettering, sign, advertisement, decoration, or notice on the windows or doors or on the exterior of the Premises which is not in each instance (i) approved in writing by Landlord prior to installation, and (ii) in conformity with Landlord's standard sign and store front program for the Building, as such program may be modified by Landlord from time to time by notice to Tenant. Tenant shall remove from the Premises any such items installed without Landlord's approval, and if Tenant fails to do so promptly after notice from Landlord, Landlord may perform such work on Tenant's behalf, and Tenant shall pay all costs and expenses incurred by Landlord in so doing, as provided in Article 21. On or before the expiration or earlier termination of this Lease, Tenant shall remove all lettering, signs, advertisements, decorations, and notices from the Premises. (j) Not install, place or permit any awning or canopy on the perimeter walls of the Premises unless provided or approved by Landlord, and if so provided or approved, keep each such awning clean and in good order, repair and appearance to Landlord's reasonable satisfaction, including, whenever necessary in Landlord's reasonable judgment, the replacement of awning coverings with materials approved by Landlord. Where any such awning has been provided by Landlord, Landlord will make all repairs and replacements to the framework or mechanical parts thereof, at Tenant's expense. (k) Within the Premises, maintain and provide exercise equipment, fixtures, amenities, appearances, finishes and the like not materially different from those maintained and provided on the date of this Lease at the facility known as "The Reebok Sports Club" located at 160 Columbus Avenue, New York, New York (excepting only a swimming pool, child care facility, rock climbing wall, and a so-called "white table cloth" restaurant), but never less than the exercise equipment, fixtures, amenities, appearances, finishes and the like as may be added to the foregoing facility from time-to-time during the Term (excepting only the foregoing facilities). Without limitation, subject to the prior written consent of Landlord in each instance, such consent not to be unreasonably withheld, Tenant may from time-to-time add to or remove from the Premises such services or amenities as may be necessary, in Tenant's reasonable judgment, to operate a first-class health club facility in the Premises of the same or better quality as the aforementioned Reebok Sports Club. Further, from time to time during the Term, Tenant shall redecorate the Premises and refinish, renew or replace the fixtures, furnishings, decorations and equipment therein as may be necessary, in Landlord's reasonable judgment, to preserve the good and first-class appearance of the Premises. (l) At all times during the Term, keep the lights lit which illuminate those shop windows of the Premises on the street and mezzanine levels facing the street during non-daylight hours. (m) Maintain a contract to have the door and brass signage above the exterior of the Premises polished semi-annually in a manner satisfactory to Landlord, submit maintenance records with respect to such metal maintenance to the Building manager on a semi-annual basis, and make such maintenance records available for review by the Building manager upon request at all times during the Term. If Tenant fails comply with the provisions of this Section 36.2(m) promptly after notice from Landlord, Landlord may perform such work on Tenant's behalf, and Tenant shall pay all costs and expenses incurred by Landlord in so doing, as provided in Article 21. -56- 61 (n) Provide and maintain in good working order during the Term a security system adequate to provide reasonable protection to the Premises, including a 24-hour direct response smoke, fire and burglary alarm system. If Tenant employs security guards at the Premises, under no circumstances shall such security guards carry firearms of any kind. Tenant understands that Landlord will not provide Tenant with any security guards or alarm or security systems of any kind for nature, and will have no liability or obligation to Tenant arising from any claims for loss, injury or damage to persons or property in connection therewith. (o) As soon as practicable and in any event within 24 hours after any exterior or interior glass (including mirrors) is broken or cracked, including any so-called "bulls eye" break in the glass, replace such glass with glass of the same kind and quality, and repair or replace the frames for such glass if necessary or desirable in Landlord's reasonable judgment, and if Tenant fails to do so promptly after notice from Landlord, Landlord may perform such work on Tenant's behalf, and Tenant shall pay all cost and expenses incurred by Landlord in so doing, as provided in Article 21. (p) Not conduct any clearance, "going-out-of-business", auction, distress, fire or bankruptcy or similar sale in the Premises. (q) Place no fixtures, furnishings, decorations or equipment (excepting trade fixtures and athletic equipment) in the Premises at any time during the Term, without the prior written approval of Landlord in each instance. Tenant shall remove from the Premises any such items installed without Landlord's approval, and if Tenant fails to do so promptly after notice from Landlord, Landlord may perform such work on Tenant's behalf, and Tenant shall pay all costs and expenses incurred by Landlord in so doing, as provided in Article 21. On or before the expiration or earlier termination of this Lease in accordance with the provisions of this Lease, Tenant shall remove all fixtures, furnishings, decorations and equipment from the Premises. (r) Not remove any trade fixtures from the Premises without the prior consent of Landlord in each instance, except that Tenant may remove trade fixtures as long as Tenant promptly installs replacement trade fixtures at least equal in quality, value and function to those being removed. (s) Not (i) place or maintain any merchandise or other articles in the concourse or in any other area outside of the Premises, or on the sidewalks, corridors or other common areas of the Center, nor (ii) receive or ship articles of any kind outside the designated loading areas for the Premises, nor (iii) permit the parking of vehicles so as to interfere with the use of any driveway, corridor, footwalk, parking area or other common area of the Center. (t) Operate the Premises in a manner consistent with its location in a first class office building including the exercise of methods of crowd control, security and the prevention of prospective customers congregating in and about the Premises as may be required by Landlord. Tenant shall take all necessary steps to prevent prospective customers from entering, using, congregating in or causing a disturbance in the lobby area of the Building or in and around the sidewalk area outside of the Building, and Tenant shall cause all patrons to enter and leave the Premises through the separate exterior door exclusively serving the Premises, and shall ensure that no lines of patrons form outside the Premises. (u) Cause all of its customers, agents, staff and employees, and all Tenant Parties, to enter and exit the Premises at all times through the separate exterior door to the Rockefeller Plaza Street, and shall not use or permit the use of the door from the Premises to the lobby of the Building excepting only in the event of emergencies. Tenant shall keep such customers, agents, staff and employees, and all Tenant Parties, from loitering in the lobbies and other areas of the Building. (v) Not use, play or operate or permit to be used, played or operated any sound making or sound reproducing device in the Premises, except in such manner and under such conditions -57- 62 so that no sound shall be heard outside of the Premises, and observe, comply with and adopt such means and precautions as Landlord may from time to time request in such connection. (w) Store or stock in the Premises only such goods, wares and merchandise as Tenant is permitted to offer for sale, at retail, in or from the Premises. (x) Not install or use any lighting equipment in or about the Premises which is visible from or casts light toward the exterior of the Premises without the prior written consent of Landlord. (y) Take all precautions to prevent any odors from emanating from the Premises, including the installation, as part of the Initial Installations, of such control devices as shall be prescribed by Landlord, and the establishment of effective control procedures, to eliminate such odors. (z) Install and maintain automatic, non-toxic, dry chemical fire extinguishing devices approved by the Fire Insurance Rating Organization having jurisdiction over the Premises, and if gas is used in the Premises, suitable gas cut-off devices (manual and automatic). (aa) Not use the utility waste lines and plumbing for any purpose other than for which they were constructed, and not permit any food, waste or other foreign substances to be thrown or drawn into the pipes. Tenant shall take all reasonable steps to prevent fat, grease, or any other greasy substance from entering the utility waste lines and plumbing of the Premises, including the installation, as part of the Initial Installations, and the maintenance thereafter, of suitable grease traps in all waste lines (and Tenant shall clear any blockage in the sewer line or lines servicing the Premises resulting from Tenant's operations, whether or not in violation of any provision hereof). (bb) To the extent that there are stacks, flues and exhausts servicing the Premises, periodically clean and otherwise maintain the same, as and when require to minimize the risk of fire and other hazards. (cc) Cause all of Tenant's waste, trash and rubbish to be deposited into, and stored in, appropriate containers to be stored within the Premises in a manner satisfactory to Landlord so that the Premises and the Building shall be maintained in a clean and slightly condition at all times, and cause all such waste, trash and rubbish to be regularly carted from the Premises in a manner satisfactory to Landlord so as to prevent the accumulation of the same, in accordance with the regulations Governmental Authorities. Tenant shall not encumber or obstruct, or permit to be encumbered or obstructed, the portion of the Building or of the sidewalk or street adjacent to or abutting the Premises. Tenant agrees to use the services of Landlord's independent sanitation contractor for removal of Tenant's rubbish and refuse from the Premises. Tenant shall refrigerate all of its food waste and other perishable refuse, at its sole cost and expense, and comply with all requirements of Governmental Authorities and Landlord with respect to refrigeration of food waste and/or sorting or recycling of rubbish and refuse. Tenant shall be required to transport its rubbish and refuse to Landlord's loading dock in a manner determined by Landlord, for ultimate removal by Landlord's independent sanitation contractor. (dd) Not sell or permit the sale of, or permit the consumption of, alcohol in the Premises or any part thereof. Section 36.3 NAME OF BUSINESS. Tenant shall always conduct its operations in the Premises under its present trade name, "Sports Club Rockefeller Center" or such other trade name as may be approved, in advance, by Landlord. Section 36.4 BREACH BY TENANT. Tenant understands and agrees that a breach by Tenant of any of the provisions of this Article 36 shall be deemed a material breach of this Lease and considered an Event of Default hereunder. Tenant acknowledges that damages resulting from any breach of the provisions of this Article 36 are difficult, if not impossible to ascertain and concedes that, among other remedies for such breach permitted by law or the provisions of this Lease, Landlord shall be entitled to enjoin Tenant from any violation hereof. -58- 63 ARTICLE 37 RENEWAL OPTIONS Section 37.1 EXERCISE OF OPTIONS. Subject to the conditions of this Article 37, Tenant shall have the right, at its sole option, to renew the Term for all of the Premises for 2 renewal terms (collectively, the "Renewal Terms" and each a "Renewal Term") of 5 years each, by providing written notice (each, a "Renewal Notice") delivered to Landlord not less than 12 months prior to the then-applicable Expiration Date; provided, however, that (a) Tenant shall not be in default under any of the terms, covenants or conditions of this Lease either on the date the Renewal Notice is given or on the Renewal Term Commencement Date (as hereinafter defined), and (b) Tenant shall not have assigned this Lease, or subleased more than 10% of the rentable area of the Premises (excepting only pursuant to an assignment which Landlord has consented to in accordance with the provisions of Section 16.8(a) of this Lease and/or a sublease (or subleases) which Landlord has consented to under Section 16.13 of this Lease). Upon the giving of the Renewal Notice, this Lease shall be deemed renewed for the Renewal Term with the same force and effect as if the Renewal Term had originally been included in the Term. The first Renewal Term shall commence on the day after the Expiration Date (a "Renewal Term Commencement Date") and shall terminate on the day immediately preceding the 5th anniversary of the Expiration Date. The second Renewal Term shall commence on the date after the expiration of the first Renewal Term and shall terminate on the 5th anniversary thereof. Tenant shall have no further option to extend the Term of this Lease other than the 2 five-year terms herein provided. Time is of the essence with respect to the giving of a Renewal Notice by Tenant. Section 37.2 TERMS. All of the terms, covenants and conditions of this Lease shall continue in full force and effect during each Renewal Term, except that (a) the Fixed Rent for the first Renewal Term shall be payable at a rate of 112% of the Fixed Rent for the last year of the initial Term; (b) the Fixed Rent for the second Renewal Term shall be in an amount equal to the Fair Market Value of the Premises (determined as provided in Section 37.3); (c) after the delivery of the second Renewal Notice, Tenant shall no further right to renew the Term; (d) the Base Tax Year will be the Tax Year commencing on the July 1st prior to the Renewal Term Commencement Date; and (e) the Base Operating Year will be the Computation Year commencing on the January 1st prior to the Renewal Term Commencement Date. Any termination, cancellation or surrender of the entire interest of Tenant under this Lease at any time during the Term shall terminate and extinguish any right of renewal of Tenant hereunder. Section 37.3 DETERMINATION OF FAIR MARKET VALUE. For purposes of determining the Fixed Rent payable during the second Renewal Term, the fair market value of the Premises (the "Fair Market Value") shall be the fair market annual rental value of the Premises at the commencement of the second Renewal Term for a term equal to the second Renewal Term, as determined by Landlord based on comparable space in the Building and in comparable buildings in the Center, including all of Landlord's services provided for in this Lease and with the Premises considered (a) as vacant, and (b) in "as is" condition on the Renewal Term Commencement Date for the second Renewal Term. The calculation of the Fair Market Value shall also be adjusted to take into account any construction allowances, work letters, free-rent periods or other inducements as shall then be prevalent in comparable transactions. Section 37.4. ARBITRATION. If Tenant shall dispute Landlord's determination of Fair Market Value pursuant to Section 37.3, Tenant shall give notice to Landlord of such dispute within 10 days of Tenant's receipt of Landlord's determination, and such dispute shall be determined by a single arbitrator appointed in accordance with the American Arbitration Association Real Estate Valuation Arbitration Proceeding Rules. The arbitrator shall be impartial and shall have not less than 10 years' experience in the County of New York in a calling related to the leasing of commercial space in buildings comparable to the Building, and the fees of the arbitrator shall be shared by Landlord and Tenant. Within 15 days following the appointment of the arbitrator, Landlord and Tenant shall attend a hearing before the arbitrator at which each party shall submit a report setting forth its determination of the Fair Market Value of the Premises for the Renewal Term, together with such information on comparable rentals and such other evidence as such party shall deem relevant. The arbitrator shall, within 30 days following such hearing and -59- 64 submission of evidence, render his or her decision by selection the determination of Fair Market Value submitted by either Landlord or Tenant which, in the judgment of the arbitrator, most nearly reflects the Fair Market Value of the Premises for the second Renewal Term. The arbitrator shall have no power or authority to select any Fair Market Value other than a Fair Market Value submitted by Landlord or Tenant. Prior to the determination of the arbitrator, Tenant shall pay Rent in the amount equal to Landlord's determination of Fair Market Value submitted to Tenant pursuant to Section 37.3, and following the arbitrator's final determination, the amount of any overpayment or underpayment shall be adjusted between the parties. Section 37.5 LEASE AMENDMENT. Notwithstanding the fact that upon delivery of each Renewal Notice Tenant's exercise of the option to extend the Term shall be automatic and self-executing, upon request by Landlord made on or following the Renewal Term Commencement Date, Tenant will execute, acknowledge and deliver to Landlord an amendment to this Lease setting forth the Renewal Term Commencement Date, Fixed Rent for the Renewal Term, and the Renewal Term Expiration Date. The failure of either party to execute and deliver such an amendment shall not affect the rights or the parties under this Lease. ARTICLE 38 SPECIAL PROVISION Notwithstanding anything to the contrary contained herein, provided that Tenant shall have initially opened for business in the Premises as provided in this Lease and shall have continuously operated its business therein, without otherwise being in default hereunder, then at any time after the 5th anniversary of the date on which Tenant initially opens for business in the Premises, Tenant shall have the right to cease operating its business in the Premises by providing not less than 30 days prior notice to Landlord of its intention to do so. In such event Tenant shall continue to perform all of its other obligations under this Lease, including the obligation to make payments on account of Rent hereunder. If Tenant ceases operating its business in the Premises, then at any time thereafter while such cessation or discontinuance continues, Landlord shall have the right to terminate this Lease by sending notice to that effect to the Tenant, and this Lease shall terminate on the 45th day after the giving of such notice, unless the following conditions are fully and completely satisfied: (i) within 30 days after Landlord sends said notice to Tenant, Tenant notifies Landlord of its intention to recommence operating its business in the Premises, (ii) within 45 days after Landlord sends said notice, Tenant reopens its business in the Premises and continues to operate its business therein in accordance with the requirements of this Lease for the remainder of the Term, and (iii) Tenant shall have no further right under this Article 38 to cease operating its business in the Premises. In the event that the Landlord exercises its right to terminate this Lease as set forth above, then Tenant shall surrender possession of the Premises in accordance with the requirements of this Lease, this Lease shall be of no further force and effect after the date of termination, and neither party shall have any further obligations to the other in connection with this Lease, subject, however, to the payment by Tenant to Landlord of all sums then due and owing or having accrued to Landlord hereunder. ARTICLE 39 RGTS AREA Landlord may elect, at Tenant's cost and expense, to perform or cause to be performed, any and all work necessary to provide access and egress to and from the area on the 3rd floor of the Building which is shown on Exhibit A-5 as RGTS (the "RGTS Area"), which work may include the following (collectively, the "RGTS Area Access Work"): (i) modification of the existing elevator car(s) and elevator controls as may be required to limit access to the RGTS Area; (ii) construction of an opening in the wall of the RGTS Area in order to create access to the existing stairway located at the western wall of the RGTS Area; (iii) construction of a new stairway in the location of the existing bathrooms which are adjacent to the RGTS Area, which stairway will connect the 2nd and 3rd floors; (iv) creation of an exit passageway to the existing stairway at -60- 65 the 2nd floor stair landing; and (v) any and all other work relating to such access and egress, including the removal and abatement of asbestos, the relocation of mechanical systems, and the like. Tenant shall reimburse Landlord for all costs and expenses of every kind, nature and description incurred by Landlord in connection with the RGTS Area Access Work, including soft costs, architectural and engineering fees and costs of tenant coordination. Tenant shall make payments to Landlord on account thereof from time-to-time within not more than 10 days after Landlord delivers to Tenant an invoice or invoices therefor. Tenant shall permit Landlord and the tenants and occupants of the RGTS Area to enter and pass through the Third Floor Premises, at all times, for the purpose of gaining and maintaining access to and egress from the RGTS Area. Tenant shall not obstruct or permit the obstruction of said means of access and egress to and from the RGTS Area, including the elevator doors which open into the Third Floor Premises. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. LANDLORD: RCPI TRUST By: Tishman Speyer Properties, L.P., its Agent By: /s/ Geoffrey P. Wharton --------------------------------- Geoffrey P. Wharton TENANT: SPORTS CLUB COMPANY, INC. By: /s/ David M. Talla --------------------------------- Name: David M. Talla Title: CEO Tenant's Federal Identification Number: 95-4479735 ------------------------------------ -61- EX-10.65 4 EXHIBIT 10.65 1 EXHIBIT 10.65 VERTICAL CLUB LEASE MARCH 26, 1985 2 AMENDED AND RESTATED NET OPERATING LEASE AMONG HIRSCHFELD REALTY CLUB CORPORATION AND 328 E. 61 CORP., Landlord - and - VERTICAL FITNESS AND RACQUET CLUB, LTD., Tenant Premises: 330 East 61st Street and 333 East 60th Street, New York, New York Dated: March 26, 1985 3 INDEX
ARTICLE SUBJECT PAGE ------- ------- ---- 1. Term ....................................................................................... 3 2. Rental ..................................................................................... 4 3. Use of Demised Premises; The Existing Leases ............................................... 9 4. Payment of Taxes ........................................................................... 14 5. Prorations ................................................................................. 18 6. Condition and Care of the Demised Premises; Repairs, Improvements and Alterations .......... 18 7. The 328 Easement ........................................................................... 25 8. Zoning Rights .............................................................................. 27 9. Compliance with Laws ....................................................................... 30 10. Indemnification of Landlord; Limitation of Liability ....................................... 35 11. Insurance .................................................................................. 37 12. Damage or Destruction ...................................................................... 42 13. Condemnation ............................................................................... 50 14. Removal of Tenant's Property ............................................................... 55 15. Landlord's Right to Perform Tenant's Covenants and cure Tenant's Defaults; Tenant's Right to Perform Landlord's Covenants and Cure Landlord's Defaults ................................ 56 16. Discharge of Liens ......................................................................... 59 17. Landlord's Access to Demised Premises ...................................................... 60 18. Assignment, Subletting and Control ......................................................... 61 19. Default .................................................................................... 66 20. Quiet Enjoyment ............................................................................ 73 21. Subordination .............................................................................. 74 22. Brokerage .................................................................................. 78 23. Lease Status; Landlord's and Tenant's Certificates ......................................... 79 24. Holdover ................................................................................... 80 25. Renewal Options ............................................................................ 80 26. Surrender of Premises ...................................................................... 92 27. Signs ...................................................................................... 93 28. Waiver of Trial by Jury .................................................................... 93 29. Miscellaneous Provisions ................................................................... 94
4 EXHIBIT A-1 - Legal Description of the Main Parcel EXHIBIT A-2 - Legal Description of the Elevator Shaft Parcel EXHIBIT B-1 - Permitted Encumbrances for Main Parcel EXHIBIT B-2 - Permitted Encumbrances for Elevator Shaft Parcel EXHIBIT C - Form of Memorandum regarding terms of Lease and Restrictions on 336 Site EXHIBIT D - Existing Leases Assignment Agreement EXHIBIT E - Form of Existing Lease Estoppel Certificate EXHIBIT F - Copies of Existing Leases EXHIBIT G - Form of 328 Easement Agreement EXHIBIT H - Form of Amended Non-Disturbance Agreement
5 AMENDED AND RESTATED NET OPERATING LEASE THIS LEASE, dated as of March 26, 1985, by and among Hirschfeld Realty Club Corporation, a New York corporation, formerly known as Vertical Club Corporation, having an office at 336 East 61st Street, New York, New York 10021 ("Hirschfeld") and 328 E. 61 Corp., a New York corporation, having an office at 336 East 61st Street, New York, New York 10021 ("328" and, together with Hirschfeld, being hereinafter collectively referred to as "Landlord"), as landlord, and Vertical Fitness and Racquet Club, Ltd., a New York corporation, having an office at 330 East 61st Street, New York, New York 10021, as tenant ("Tenant"). W I T N E S S E T H: WHEREAS, Hirschfeld and Tenant are the parties to a certain lease, dated as of August 26, 1980, as modified by Letter Agreement, dated September 29, 1980 (said lease, as so modified, being hereinafter referred to as the "Prior Lease"), covering a substantial portion of the Demised Premises (as hereinafter defined); WHEREAS, Landlord and Tenant are mutually desirous of amending the Prior Lease and restating the same in its entirety, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto hereby mutually agree that the Prior Lease is amended and restated in its entirety so that all of the terms and provisions thereof are as contained herein as follows: Landlord hereby leases to Tenant and Tenant hereby leases from Landlord that certain parcel of land (the "Main Parcel") being more particularly described on Exhibit A-1 annexed hereto and made a part hereof and that certain parcel of land (the "Elevator Shaft Parcel") being more particularly described on Exhibit A-2 annexed hereto and made a part hereof, together with the building (the "Building") and other structures and improvements now or hereafter erected thereon (the "Improvements"). TOGETHER WITH: (a) all right, title and interest, if any, of Landlord in and to any land lying in the bed of any street, road or avenue, open or proposed, in front of or adjoining the Main Parcel, to the center line thereof; (b) all right, title and interest, if any, of Landlord in and to any strips and gores of land adjacent to, abutting or used in connection with the Main Parcel, and in and to easements, if any, inuring to the benefit of the Demised Premises (or the fee owner thereof), the equipment located on the roof of the Adjacent Parcel (as hereinafter defined) or otherwise as more particularly described in the 328 Easement (as defined and being more particularly described in Section 7.01 hereof); (c) all appurtenances and hereditaments belonging or in any wise appertaining to the Main Parcel; and (d) all apparatus, fixtures, equipment and articles of personal property now or hereafter attached to or used in connection with the operation and maintenance of the Improvements (all of the foregoing items being hereinafter collectively referred to as the "Demised Premises"). SUBJECT TO the Existing Leases (as hereinafter defined) and all those certain conditions and other matters affecting the title of the Demised Premises as set forth on Exhibits B-1 and B-2 annexed hereto and made a part hereof (the "Permitted Encumbrances"). IT IS MUTUALLY COVENANTED AND AGREED between Landlord and Tenant as follows: ARTICLE 1 6 TERM 1.01 TO HAVE AND TO HOLD the Demised Premises for a term that commenced on the date set forth in the Prior Lease (the "Commencement Date") and expiring on September 30, 2001 (such date, or such earlier date upon which the term of this Lease shall terminate or such later date to which the term of this Lease shall be extended, being hereinafter referred to as the "Expiration Date"). 1.02 Simultaneously with the execution hereof, Landlord and Tenant shall each duly execute and acknowledge a memorandum of lease in the form annexed hereto as Exhibit C, and Tenant shall cause same to be duly recorded in the New York County Office of the Register of the City of New York (the "City Register's Office"), as affecting (i) the Demised Premises and (ii) the 336 Site (as defined in Article 7 hereof), but only to the extent provided by Article 8 hereof with respect to the utilization of Excess Zoning Rights (as defined in Article 8 hereof) that are appurtenant to the Demised Premises and the Adjacent Parcel (as defined in Article 7 hereof) in connection with the construction of the East Tower Improvements (as defined in Article 8 hereof) in such manner so as to, among other matters, prevent any encroachment onto the Demised Premises, or any portion thereof. ARTICLE 2 RENTAL 2.01 Tenant agrees to pay Landlord a fixed rental ("Fixed Rent"), (a) with respect to the period from and after the date hereof and until September 30, 1988, at the rate of Seven Hundred Ninety Two Thousand ($792,000) Dollars per annum and (b) for each ensuing four (4) year period (i.e., October 1, 1988 until September 30, 1992, October 1, 1992 until September 30, 1996, October 1, 1996 until September 30, 2000), and for the one (1) year period from October 1, 2000 until September 30, 2001, at a rate equal to the Fixed Rent per annum that was payable immediately prior to the commencement of such four (4) year period or one (1) year period, as the case may be, increased by Seventy-Two Thousand ($72,000) Dollars. The Fixed Rent shall continue to be payable in equal monthly installments equal to one-twelfth (1/12th) of the annual rate of Fixed Rent, in advance, on the first day of each successive calendar month during the term of this Lease, at the office of Landlord, or such other place as Landlord may designate in writing from time to time. Rent for any portion of a month shall be prorated. The Fixed Rent payable by Tenant pursuant hereto shall be over and above all other payments required to be made by Tenant as provided in this Lease. All Fixed Rent, additional rent (as hereinafter provided) and other sums payable by Tenant hereunder shall be paid in lawful money of the United States of America, which shall be legal tender for the payment of all public and private debts at the time of payment. If Landlord shall not have received the payment of any Rent or other sum due it pursuant to the provisions of this Lease within fifteen (15) days after the date on which such rent or other sum first became due (the "Due Date"), then Tenant shall pay to Landlord, on demand as a late payment penalty or fee, interest thereon at the Penalty Rate from the Due Date until payment of such amount is received by Landlord. Provision in this Lease for a late payment fee or penalty shall not be deemed to be in lieu of Landlord's rights hereinafter provided for upon the occurrence of an Event of Default. 2.02 Tenant shall pay for all public utilities, including all charges for electricity, water, sewerage, heat, fuel oil, gas, steam and telephone, incurred in connection with the operation of the Demised Premises during the term of this Lease. Tenant shall have the right, in the exercise of its sole and absolute discretion, to enter into such new arrangements or to continue existing arrangements in effect with respect to submetering or otherwise accounting for and billing subtenants of any portion of the Demised Premises. 2.03 During the remaining current term of each of the Existing Leases (as that term is defined in Article 3 hereof), Tenant shall also pay to Landlord, as additional rent hereunder, an amount equal to any and all rental 7 payments payable by the sub-tenants under the terms of each of the Existing Leases (less the portion of any such rental payments that are attributable to tax and/or insurance-cost escalations, pursuant to the provisions of Section 44 of the Larama Lease and Section 46 of the L.P. Lease, respectively), which amount shall be payable by Tenant to Landlord whether or not such rents have been actually paid by the sub-tenants under each of the Existing Leases to Tenant. In connection with the assignment by Landlord to Tenant of all its right, title and interest in and to the Landlord's interest under each of the Existing Leases as referred to in Section 3.01 hereof, Landlord shall promptly notify the tenants under each of the Existing Leases to make all rental and other payments thereunder directly to Tenant and Tenant shall hereafter have the absolute right to bring any action or proceeding against the tenants under either of the Existing Leases for non-payment of rent or otherwise take any appropriate actions to enforce the provisions thereof. To the extent that either of the tenants under the Existing Leases is in arrears with respect to payment of rent or other charges under its lease as of the date hereof (or is obligated to pay charges thereunder that are attributable to periods prior to the date hereof which are not yet due), Tenant shall remit such amounts to Landlord on an if, as and when collected basis (in the case of amounts in arrears at the date hereof after receipt by Tenant of current rentals and any arrearages arising from and after the date hereof); provided, however, that Landlord will be entitled to receive arrearages owing to Landlord on the date hereof from the tenants under the Existing Leases (but only to the extent not more than thirty (30) days in arrears on the date hereof) from first rentals or other charges paid to Tenant by each of the tenants under the Existing Leases. From and after the expiration of the existing terms of each of the Existing Leases and throughout the remainder of the original term of this Lease, Tenant shall pay to Landlord, as additional rent hereunder, a fixed rental for the spaces presently covered by each of the Existing Leases (the "Additional Space") calculated as follows: (1) With respect to the space covered by the Larama Lease, from and after the expiration of the term thereof on October 31, 2000 and until the Expiration Date of the original term of this Lease, additional rent shall be payable hereunder for such space at a rate equal to the then fair market rental value thereof (such fair market rental value to be determined on the basis of (a) the use being made of such Additional Space at the date hereof or (b) the use being made of such Additional Space immediately prior to such term expiration, whichever yields the higher value, and considering the terms and conditions of this Lease), which fair market rental value shall be determined by appraisal in accordance with the provisions of Sections 25.03 and 25.04 hereof; provided, however, that Landlord shall be responsible for and bear all costs and expenses incurred by either party with respect to such appraisal. (2) With respect to the space covered by the L.P. Lease, from and after the expiration of the term thereof on June 30, 1990, additional rent shall be payable hereunder for such space (i) for the four (4) year period from and after July 1, 1990 and until June 30, 1994, at a rate equal to the then fair market rental value thereof, (such fair market rental value to be determined on the basis of (a) the use being made of such Additional Space at the date hereof or (b) the use being made of such Additional Space immediately prior to such term expiration, whichever yields the higher value, and considering the terms and conditions of this Lease), which fair market rental value shall be determined by appraisal in accordance with the provisions of Sections 25.03 and 25.04 hereof and (ii) for each of the ensuing four (4) year period (i.e., July 1, 1994 and until June 30, 1998), and the period from July 1, 1998 until September 30, 2001 (the Expiration Date of the original term of this Lease), at a rate equal to the amount of additional rent payable hereunder with respect to such Additional Space that was payable immediately prior to commencement of such period, increased by ten (10%) percent of the annual rent payable as provided in clause (i) above. 2.04 Except as otherwise specifically set forth herein, this Lease shall be deemed and construed to be a "net lease" and Tenant shall pay absolutely net throughout the term of this Lease, the Fixed Rent, additional rent and all other amounts payable by Tenant hereunder (collectively, "Rent"), free of any charges, assessments, impositions, expenses or deductions of any kind, and under no circumstances or conditions, whether now existing or hereafter arising, or whether within or beyond the present contemplation of the parties, shall Landlord be expected or required, except as otherwise specifically provided herein, to make any payment of any kind whatsoever or be under any other obligation or liability hereunder, and Tenant agrees to pay all costs and expenses of every kind and nature 8 whatsoever arising from or in connection with the Demised Premises which may arise or become due during, or with respect to, the period from and after the date hereof and until the Expiration Date, and which, except for the execution and delivery hereof, would have been payable by Landlord. ARTICLE 3 USE OF DEMISED PREMISES; THE EXISTING LEASES 3.01 Subject to and in accordance with all applicable rules, regulations, laws, zoning and other ordinances, statutes and requirements of all governmental authorities and the Fire Insurance Rating Organization and Board of Fire Insurance Underwriters, and any similar bodies, having jurisdiction thereof, Tenant is hereby authorized to and shall be permitted to use the Demised Premises for any lawful purpose, including, without limitation, as a tennis and sport complex, health spa, office space, restaurant, night club, cabaret, restaurant, garage and for the sale of sports and fitness equipment, health foods, vitamins and juices; provided, however, that the use of the Demised Premises shall at all times continue to be commensurate with, at least comparable in quality to and harmonious with the uses made of buildings and improvements in the vicinity of the Demised Premises. It is acknowledged by the parties hereto that the portion of the Demised Premises (a) currently occupied by L.P. Rent A Car, Inc. ("L.P."), a New York corporation, pursuant to the provisions of a certain Lease, dated July 17, 1980 (the "L.P. Lease"), between Vertical Club Corporation, as landlord, and L.P., as tenant, the landlord's interest thereunder (together with the security deposit and accrued interest thereon, if any, held by Landlord thereunder) having been assigned to Tenant on even date herewith by an assignment agreement (the "Existing Leases Assignment Agreement") in the form annexed hereto as Exhibit D, such premises comprising certain basement space (exclusive of mechanical equipment areas) currently being utilized as a garage operation are for the storage and rental of motor vehicles, together with a ramp and driveway exit therefrom leading to and exiting upon East 61st Street, New York, New York, all being more particularly described in the L.P. Lease, and (b) currently occupied by Larama Corp. ("Larama"), a New York corporation, pursuant to the provisions of a certain Lease, dated October 22, 1980 (the "Larama Lease" and, together with the L.P. Lease, being collectively referred to herein as the "Existing Leases"), between Vertical Club Corporation, as landlord, and Larama, as tenant, the landlord's interest thereunder (together with the security deposit and accrued interest thereon, if any, held by Landlord thereunder) having been assigned to Tenant on even date herewith by the Existing Leases Assignment Agreement, such premises being commonly referred to as the ground floor level of 333 East 60th Street, New York, New York, and being more particularly described in the Larama Lease, is currently being used as a nightclub, cabaret and for the conduct of a restaurant business. Simultaneously with the delivery to Tenant of the Existing Leases Assignment Agreement covering both of the Existing Leases in the manner as aforesaid, Landlord shall use its reasonable efforts in order to cause each of the tenants under the Existing Leases to designate Tenant as an additional named insured on all policies of insurance maintained by each of the tenants under the Existing Leases and to deliver certificates evidencing such coverage to Tenant. 3.02 Landlord will use its reasonable efforts in order to cause to be delivered to Tenant, simultaneously with the execution hereof, an estoppel certificate ("Existing Lease Estoppel Certificate") executed by each of the tenants under the Existing Leases in the form annexed hereto as Exhibit E, with respect to each of their respective tenancies covering portions of the Demised Premises pursuant to the Existing Leases. Landlord hereby represents and warrants to Tenant with respect to each of the Existing Leases that (i) same is in full force and effect, (ii) Landlord has received no written notice of any default thereunder which remains in effect and is not aware of any fact or facts which would now or with the giving of notice or the passage of time, or both, be a default under the terms thereof (other than a default by Landlord in performing general maintenance obligations), (iii) annexed hereto as Exhibit F are true and complete copies thereof and all amendments thereto and there are no other agreements, written or oral, between Landlord and either of the Existing Tenants to amend or otherwise modify either of the Existing Leases and (iv) there are no unpaid fees, commissions or other items of compensation owing to or claimed by any brokers with respect to either of the Existing Leases. 3.03 From and after the date hereof, Tenant, in its capacity as successor landlord under each of the Existing Leases, shall have the sole and absolute right to deal exclusively with each of the tenants under the Existing Leases with respect to any and all matters concerning their respective tenancies. Landlord acknowledges and agrees that 9 Tenant is authorized, in its sole and absolute discretion, subject, however, to the terms of the Existing Leases, to make whatever changes and alterations it deems necessary or desirable in connection with its use of all or any portion of the Demised Premises and the space covered by either or both of the Existing Leases including, without limitation, the construction of a stairway connecting the public lobby area of the Demised Premises to all lower levels thereof and the entering into of any existing or future agreements between Tenant and either or both of the tenants under the Existing Leases that Tenant deems appropriate in connection with effecting the construction of such stairway; provided that such changes and alterations do not impair the structural integrity or diminish the value of the Demised Premises as a whole or cause any violation of any applicable laws, ordinances or other requirements of the appropriate local governmental authorities, and that the use of the Demised Premises and the space affected by such changes and alterations continue to remain in compliance with the provisions of Section 3.01 hereof. 3.04 Landlord hereby covenants and agrees to indemnify and save harmless Tenant from and against any and all liabilities, damages, suits, claims (whether by either of the tenants under the Existing Leases or by brokers) and demands (other than with respect to general maintenance obligations) arising from or in connection with any and all matters pertaining to either of the Existing Leases (or the security deposits thereunder) with respect to the period up to and including the date of this Lease. Tenant hereby covenants and agrees to indemnify and save harmless Landlord from and against any and all liabilities, damages, suits, claims (whether for brokerage fees or otherwise), and demands in connection with either of the Existing Leases (or the security deposits thereunder), but only to the extent any such matters arise from and after the date hereof and result from conditions or circumstances (other than conditions requiring the performance of general maintenance obligations) which did not exist prior to the date hereof (i.e., the date of this Amended and Restated Net Operating Lease). 3.05 Except as otherwise provided in Article 9 hereof with respect to Existing Conditions (as defined in Article 9), Tenant agrees not to use or occupy or permit the Demised Premises to be used or occupied, nor do or permit anything to be done in or on the Demised Premises, or any part thereof, in a manner that would in any way violate any Certificate of Occupancy in effect with respect to the Demised Premises, make void or voidable any insurance then in force with respect thereto, make it impossible to obtain fire or other insurance thereon required to be furnished hereunder by Tenant, cause or be likely to cause structural injury to any of the Improvements or constitute a public or private nuisance or waste. 3.06 Neither any action or inaction by Landlord nor any of the provisions contained herein shall be deemed or construed to indicate that Landlord has granted to Tenant any right, power or permission to do any act or to enter into any agreement that may create, give rise to, or be the foundation for, any right, title, interest, lien, charge or other encumbrance upon the estate of Landlord in and to the Demised Premises. ARTICLE 4 PAYMENT OF TAXES 4.01 As used herein, the term "Taxes" shall mean all taxes, assessments, water charges and sewer rents, rates and charges, transit taxes, charges for public utilities, excises, levies, vault charges (if any), license and permit fees and other governmental charges, general and special, ordinary and extraordinary, foreseen or unforeseen, of any kind and nature whatsoever which at any time during the term of this Lease may be assessed, levied, confirmed, imposed upon or become a lien against the Demised Premises, or any portion thereof, and which are assessed and are, or become, a lien during the term of this Lease, and such franchises as may be appurtenant to the use of the Demised Premises, this transaction or any document to which Tenant is a party in connection with any of the foregoing matters. 4.02 As additional rent, Tenant shall pay, as the same shall become due and payable, and before any fine, penalty, interest or other cost accrues thereon as a result of the non-payment thereof, all Taxes which are assessed and are, or become, a lien during the term of this Lease with respect to the Main Parcel. Tenant shall, promptly after payment, deliver to Landlord receipts evidencing payment of all such Taxes. Tenant may pay any Taxes in installments, if payment may be so made, without fine or penalty. Landlord shall furnish to Tenant bills for Taxes 10 upon receipt, and no obligation of Tenant under this Section 4.02 shall arise prior to Tenant's receipt thereof. However, Landlord shall have the right to cause bills for Taxes to be sent by the appropriate governmental authority directly to Tenant, in which event Landlord shall not be obligated to furnish same to Tenant in the manner provided by the immediately preceding sentence. "After payment of any Taxes, however, Tenant shall have the right to proceed, in good faith, to contest such Taxes or tax liens against the Demised Premises, or any part thereof, or the validity thereof, by appropriate legal proceedings. 4.03 At the request of Tenant, Landlord shall be required to join in any and all actions or proceedings referred to in the preceding Section 4.02, in which event any such action or proceeding may be taken by Tenant in the name of, but without expense to Landlord. Tenant shall serve notice upon Landlord of Tenant's intention to take such action or initiate such proceeding, and Landlord's failure to join in such action or proceeding within ten (10) days from the date of Landlord's deemed receipt of Tenant's notice in the manner provided by Section 29.01 hereof shall thereupon constitute the immediate authorization and appointment by Landlord of Tenant to act as Landlord's true and lawful representative and attorney-in-fact, coupled with an interest, with full power and authority in Landlord's name, place and stead to make, execute, sign, acknowledge, and swear, deliver, file and record at the appropriate governmental or other offices or with any appropriate parties, such documents as may be reasonably required by the subject matter of such notice. In connection therewith, Tenant shall indemnify and hold harmless Landlord from and against any and all loss, claim, damage, cost or expense, including, without limitation, reasonable attorneys' fees and disbursements, that Landlord may incur by reason of any such action or proceeding or any instrument or document executed by Landlord, or by Tenant on behalf of Landlord, pursuant to this Section 4.03. The provisions of this Section 4.03 shall not be construed to require Tenant to pay any Taxes that Tenant is not otherwise obligated to pay under the terms of this Lease. 4.04 If Tenant shall at any time fail to pay Taxes when due, Landlord shall have the right to require Tenant to enter into an escrow arrangement with and to pay over to the Trustee (as that term is defined in Section 11.03 hereof), on a monthly basis in advance, an amount equal to one-twelfth (1/12) of the annual Taxes. If Tenant shall thereafter promptly make payment of Taxes for the next ensuing one (1) year period in accordance with the requirements of this Lease, such escrow arrangement shall be terminated, subject to reinstatement if Tenant shall subsequently fail to pay such Taxes as aforesaid. It is understood that any amounts paid to the Trustee shall be held in trust and applied to the payment of the Taxes in question and, while held by the Trustee, shall be invested in the manner described in Section 11.03 hereof, and that interest accruing thereon shall be held by the Trustee for the benefit of Tenant. 4.05 Nothing contained herein shall require Tenant to pay income taxes assessed against Landlord, or any capital levy, corporation franchise, excess profits, estate, succession, inheritance, transfer or New York State gains taxes of Landlord, unless such taxes are imposed or levied or assessed as a total or partial substitute for, or in lieu of, any other Taxes required to be paid by Tenant pursuant to Section 4.02, in which event same shall be deemed to constitute Taxes and shall be paid by Tenant. ARTICLE 5 PRORATIONS All utility costs and similar items of expense pertaining to the Demised Premises for the year of termination of this Lease shall be prorated between Landlord and Tenant as of the Expiration Date. Pursuant to the terms of the Prior Lease, Tenant was responsible for the payment of seventy-nine (79%) percent of Taxes pertaining to the Demised Premises, and Landlord was required to pay twenty-one (21%) percent of all such Taxes. An appropriate adjustment and proration shall be made as of the date hereof in order to reflect the reallocation of the prospective responsibilities of the parties hereto with respect to the payment of such Taxes (ie., Tenant shall hereafter be responsible for 100% of Taxes attributable to the Main Parcel) and with respect to any other amounts payable, owing or otherwise held under each of the Existing Leases. 11 ARTICLE 6 CONDITION AND CARE OF THE DEMISED PREMISES; REPAIRS, IMPROVEMENTS AND ALTERATION 6.01 Except and to the extent otherwise expressly provided in Section 6.02, Tenant will take good care of and maintain the Demised Premises and all roadways, sidewalks and curbs in, on, adjacent and appurtenant thereto, in good order and repair at Tenant's sole cost and expense, and shall promptly remove all accumulated snow, ice and debris from any and all roadways, sidewalks, and curbs located upon or appurtenant to the Demised Premises and from any and all other sidewalks and curbs adjacent to the Demised Premises. Tenant will make all other necessary repairs and replacements to the Demised Premises, whether ordinary or extraordinary, foreseen or unforeseen, structural or non-structural, during the term of this Lease and will keep the same in good condition and repair and will, at the expiration or sooner termination of this Lease, return the Demised Premises to Landlord in good condition and repair, excepting ordinary wear and tear, damage and destruction by fire or other casualty covered by insurance and any material matters or conditions caused by or resulting from the willful acts of Landlord, or any matters existing at the time of a termination of this Lease by Landlord pursuant to the provisions of Section 25.05 hereof. In connection with the foregoing, Landlord will maintain in good condition and repair the roof of the Adjacent Parcel, and will afford Tenant reasonable access (and immediate access in the event of a system breakdown or other operating emergency in order to effect service or other repairs, which repairs and other costs incurred by Tenant in connection therewith shall be at Tenant's expense), to the air conditioning equipment, restaurant exhaust system equipment, chilling units and other equipment servicing the Demised Premises, now or hereafter situated on the roof of the Adjacent Parcel as well as pipes and other suspended mechanical apparatus running across the air space over the rear yard of the Adjacent Parcel. In connection with the foregoing, Tenant shall be responsible for the repair of any damage caused by Tenant or its equipment to the roof of the Adjacent Parcel and the compliance with all legal requirements applicable to such equipment and the maintenance thereof on the roof of the Adjacent Parcel. 6.02 Except as may otherwise be expressly agreed by Landlord and Tenant, Landlord shall not under any circumstances be required to build any improvements on the Demised Premises, or to make any repairs, replacements, alterations or renewals of any nature or description to the Demised Premises or to any of the Improvements, whether interior or exterior, ordinary or extraordinary, structural or non-structural, foreseen or unforeseen, or to make any expenditure whatsoever in connection with this Lease or to inspect or maintain the Demised Premises in any way. 6.03 In the event of any new construction, repair, changes or alterations by Tenant to the Demised Premises, the Rent payable under this Lease shall not be increased, reduced or abated in any manner whatsoever. 6.04 Tenant shall have the right at any time and from time to time during the term of this Lease, at its cost and expense, to make whatever structural and non-structural changes and alterations with respect to the Demised Premises (inclusive of Additional Spaces) as are reasonably required in order to maintain and use the same in a manner that is consistent with the requirements described in Article 3 hereof, and to otherwise continue to use all those portions of the roof of the Adjacent Parcel presently used by Tenant and in a manner that is consistent with its present usage and of the Demised Premises without additional rent or other charge therefor (all of the foregoing are hereinafter collectively called "Tenant Changes" and any of the foregoing is called a "Tenant Change"), subject, however, in all cases to the following: (i) Landlord shall receive prior notice of any specific Tenant Change involving an estimated cost of more than One Hundred Thousand ($100,000) Dollars; provided, however, that such prior notice shall not be required in the event of an emergency, but will be provided to Landlord as soon thereafter as is reasonably possible. Such amount (the "Base Amount") shall be proportionately increased or decreased (the "Adjusted Amount") for each calendar year during the term of this Lease, commencing with the Calendar Year 1986, by an amount (the "CPI 12 Adjustment") computed in accordance with the percentage increase or decrease in the Consumer Price Index for all Urban Consumers, New York and the Northeast Region, issued and published by the Bureau of Labor Statistics of the United States Department of Labor (1967=100) (the "CPI"); if the CPI is not available then based upon a reasonable substitute or successor index, or, if such a successor or substitute index is not available or may not lawfully be used for the purposes stated herein, then based upon a reliable governmental or other non-partisan publication, selected by Tenant, evaluating changes in the cost of living or purchasing power of the consumer dollar, if such a publication is available and may be lawfully used for the purposes stated herein. For the purposes of calculating fluctuations in the CPI, the calendar year 1985 shall be considered to be the base year (the "Base Year"). The Adjusted Amount for each calendar year during the term of this Lease shall be determined as follows: the Base Amount shall be increased or decreased to equal the product obtained by multiplying (a) the Base Amount by (b) a fraction, the numerator of which is the average monthly CPI for the calendar year immediately preceding the calendar year in question, and the denominator of which is the average monthly CPI for the Base Year. (ii) No Tenant Change shall be undertaken until Tenant shall have procured and paid for, so far as the same may be required from time to time, all necessary permits and authorizations of all municipal departments and governmental subdivisions having jurisdiction thereof; and, at Tenant's expense, Landlord shall join in the application for any such permits and authorizations whenever Tenant determines such action to be necessary. Landlord's failure to join in such application within ten (10) days after Landlord's deemed receipt pursuant to Section 29.01 of such application and requests Landlord to join therein, shall thereupon constitute the immediate authorization and appointment by Landlord of Tenant as Landlord's true and lawful representative and attorney-in-fact, coupled with an interest, with full power and authority in Landlord's name, place and stead to make, execute, sign, acknowledge, and swear, deliver, file and record at the appropriate governmental or other offices or with any appropriate parties, such documents as may be reasonably required by the subject matter of such notice. In connection therewith, Tenant shall indemnify and hold harmless Landlord from and against any and all loss, claim, damage, cost or expense, including, without limitation, reasonable attorneys' fees and disbursements, that Landlord may incur in connection with the application for and issuance of such permits and authorizations, any work performed pursuant thereto and any instrument or document executed by Landlord, or by Tenant on behalf of Landlord, pursuant to this subdivision (ii). (iii) Any Tenant Change involving an estimated cost of more than One Hundred Thousand ($100,000) Dollars, as adjusted by the CPI Adjustment, shall be conducted under the supervision of a licensed architect or engineer selected by Tenant and shall be made in accordance with detailed plans and specifications (the "Plans and Specifications") and cost estimates prepared by such architect or engineer. Promptly after request by Landlord, Tenant shall cause copies of the Plans and Specifications to be delivered to Landlord, and upon Landlord's request shall keep Landlord reasonably informed of the progress of any such work performed in connection with any such Tenant Change. (iv) Any Tenant Change shall be made promptly and in a good workmanlike manner and in compliance with all applicable permits and authorizations and building and zoning laws, ordinances, orders and requirements of all federal, state and municipal governments and the appropriate departments, commissions, boards and officers thereof; and in accordance with the orders, rules and regulations of the Board of Fire Insurance Underwriters and any other body hereafter exercising similar functions having or asserting jurisdiction over the Demised Premises. (v) Tenant shall carry all necessary worker's compensation insurance covering all persons employed in connection with any work performed in connection with any Tenant Change and with respect to which death or bodily injury claims could be asserted against Landlord, Tenant, the Demised Premises or the Improvements, and general liability and property damage insurance for the mutual benefit of Tenant and Landlord with limits of not less than those required to be carried pursuant to Article 10 hereof shall be maintained by Tenant, at Tenant's 13 sole cost and expense, at all times when any work is in process in connection with any new construction, repair, change or alteration and shall furnish Landlord with evidence of any and all such coverage. (vi) No Tenant Change shall impair the structural integrity or diminish the value of any building comprising a part of the Demised Premises. The building of additional stories onto the Demised Premises or any part thereof or the creation of any additional floor area therein (as that term is used in the Zoning Resolution) is specifically prohibited under the terms of this Lease. (vii) All Tenant Changes that become permanently affixed to the Demised Premises shall, upon the expiration or prior termination of this Lease and all renewal terms hereof, become the property of Landlord. ARTICLE 7 THE 328 EASEMENT 7.01 Simultaneously with the execution hereof, 328, as the fee owner of a certain parcel of land, together with the improvements situated thereon, and being commonly known as 328 East 61st Street, New York, New York (the "Adjacent Parcel"), which parcel is contiguous to the Demised Premises (the Elevator Shaft Parcel constituting a portion thereof), has executed, acknowledged and delivered to Tenant for recordation in the City Register's Office, an easement agreement (the "328 Easement Agreement") in the form annexed hereto as Exhibit G and made a part hereof, pursuant to which, among other matters, 328 has granted to Hirschfeld, as well as to Tenant, certain easements, for so long as this Lease shall remain in effect (which easements are collectively referred to herein as the "328 Easement") in order to allow the continued and uninterrupted (i) encroachment onto the portion of the Adjacent Parcel constituting the Elevator Shaft Parcel of a certain elevator shaft structure constituting a part of the Demised Premises, to the extent more particularly described in the 328 Easement Agreement; (ii) access to and use of those certain fire stairs that lead down to the rear yard of the Adjacent Parcel, fire doorway access to such stairway on the second and third floors and at the ground level of the Demised Premises; (iii) ingress to and egress from the rear yard of the Adjacent Parcel; and (iv) ingress to and egress from (through the existing roof top accessway from the Demised Premises) and use of, the roof of the Adjacent Parcel for the purpose of operating, maintaining, installing or removing any and all air-conditioning equipment, restaurant exhaust system equipment, chilling units and other equipment servicing the Demised Premises and being now situated on such roof (as well as pipes and other suspended mechanical apparatus running across the air space over the rear yard of the Adjacent Parcel), all as more particularly identified and described in the 328 Easement Agreement. The 328 Easement shall run with the land and shall inure to the benefit of all future owners, tenants and subtenants of the Main Parcel for so long as this Lease shall remain in full force and effect. In case of any conflict between the provisions of this Section 7.01 and the provisions of the 328 Easement Agreement, the provisions of the 328 Easement Agreement shall control. ARTICLE 8 ZONING RIGHTS 8.01 Landlord expressly retains all excess floor area and/or development rights (collectively, the "Excess Zoning Rights") determined pursuant to the Zoning Resolution of the City of New York, effective as of December 15, 1961, as amended on August 17, 1977 (as so amended, or as the same may hereafter be amended, the "Zoning Resolution") that are appurtenant to the Demised Premises and based upon the Improvements existing thereon as of the date hereof, and Tenant shall have no entitlement thereto. Tenant shall, upon reasonable request by Landlord, but at no cost to Tenant, take such actions and execute such documents as Landlord may reasonably deem necessary or desirable in order to confirm the continued ownership and retention by Landlord of the Excess Zoning Rights. 8.02 (a) Simultaneously with the execution and delivery of this Lease, the parties hereto shall join in the execution (and Landlord shall have theretofor caused all other necessary parties in interest to either join in or duly waive their right to join in) of a Zoning Lot and Development Merger Agreement, a Zoning Lot Description and Ownership Statement and a Declaration of Zoning Lot Restrictions, as described in Section 12-10 of the Zoning Resolution. Each of the foregoing documents shall be duly filed and recorded with the appropriate local 14 governmental authorities in order to validly create or ratify the continued existence of a single zoning lot with respect to the Demised Premises and the 328 Site. Landlord's use of the Excess Zoning Rights shall be expressly limited to the specific purpose of erecting improvements (the "East Tower Improvements") on that certain parcel of land, together with the improvements situated thereon, and commonly known as 336 East 61st Street, New York, New York (the "336 Site"), as provided by this Section 8.02. In connection with the construction of the East Tower Improvements, Landlord expressly covenants and agrees that it shall not be entitled to (i) erect any structure on, under, across or over the air space over the boundary lot line on all sides of the Demised Premises, or any portion thereof, or otherwise erect any structure on the 336 Site which encroaches upon the Demised Premises, or any portion thereof; (ii) alter or enlarge any structure on the 336 Site in a manner which encroaches upon the Demised Premises, or any portion thereof; (iii) use any portion of the improvements on the Demised Premises for "party wall" purposes; or (iv) enter upon the Demised Premises, or any portion thereof (except to such extent as may be reasonably required for the construction work on the 336 Site for inspection purposes only and such limited entry shall only be permitted after the business hours of the Demised Premises or on reasonable advance notice during business hours, or in case of emergency, in which event prior notice will not be required). Landlord expressly covenants and agrees that the construction of the East Tower Improvements shall be conducted in such manner so as not to increase any costs or expenses borne by Tenant with respect to the operation or maintenance of the Demised Premises, impair in any way the structural support of the Demised Premises or unreasonably interfere with the peaceable and uninterrupted conduct of Tenant's business at the Demised Premises, (e.g., Landlord shall not cause the entrance to the Demised Premises or the streets in the vicinity thereof to be unreasonably blocked by trucks, vans or other vehicles whether in connection with the delivery of construction materials, for parking purposes or otherwise; Landlord shall not allow any scaffolding or other platform or structure to encroach unreasonably upon the entrance to the Demised Premises or any portion thereof; Landlord shall take reasonable steps in order to prevent any action on its behalf or by its agents, employees, and contractors that might cause the falling of any dirt or debris onto the roof or any other portion of the Demised Premises; and Landlord shall not allow any temporary or other structures to be erected unreasonably near the entrance to the Demised Premises). Landlord shall indemnify and save harmless Tenant from and against any and all liability, loss, cost, claim, injury, damage or other expense of any nature whatsoever that may be claimed or asserted against Tenant or otherwise suffered by any member (or guests of any member) of the health club or other facilities operated at the Demised Premises resulting from the unreasonable interference with the use of the Demised Premises by any such parties arising from or in connection with any construction work performed by or on behalf of Landlord with respect to the East Tower Improvements. ARTICLE 9 COMPLIANCE WITH LAWS 9.01 Except with respect to (a) any current or potential future violation of the existing Certificate of Occupancy for the Building which results solely by reason of the use and operation of the Demised Premises as a health club on a basis substantially similar to the manner of use and operation thereof at the date hereof (excluding, however, any such violation resulting from alterations or physical changes heretofore or hereafter made by Tenant in the Demised Premises) and (b) any currently existing violation of applicable governmental laws or rules arising from the actual or purported status, prior to the date hereof, of the Demised Premises as constituting a part of a single zoning lot (together with the Adjacent Parcel) (collectively, "Existing Conditions") (which matters neither Tenant nor Landlord shall in any way be obligated to cure), Tenant shall comply with all orders, regulations, rules and requirements of every kind and nature relating to the Demised Premises, now or hereafter in effect, of all governmental authorities, whether they be usual or unusual, ordinary or extraordinary, or whether they or any of them relate to any structural changes or requirements of whatever nature, or to changes or requirements incident to or as the result of any use or occupancy thereof or otherwise, including all orders, rules and regulations of the national and local boards of fire underwriters or any other body exercising similar functions. In the event that as a result of the failure of either of the parties hereto to effect the cure of any Existing Conditions, any governmental authority with jurisdiction over the Demised Premises determines that the continued use of the Demised Premises by Tenant in the furtherance of its business affairs, as conducted at the date hereof, is unlawful or must be further restricted in any material and adverse 15 way, then Tenant shall have the right to cancel this Lease on not less than thirty (30) days prior written notice to Landlord, and at the expiration of such time period, this Lease and the term hereof shall cancel and terminate as if such date was the Expiration Date of this Lease; provided, however, that Landlord shall be entitled to elect, at any time prior to expiration of the aforesaid thirty (30) day period, by notice to Tenant, to cure any such Existing Conditions and, if such cure is effected prior to the expiration of said thirty (30) day period, or if such Existing Condition is not susceptible of being cured within such thirty (30) day period and Landlord commences to cure and diligently prosecutes such cure to completion within a reasonable period thereafter, then Tenant will not be entitled to so cancel this Lease. Notwithstanding the foregoing, Landlord expressly agrees that the status of any and all Existing Conditions with respect to the Demised Premises (and any actions that may hereafter be taken by any govermental authority in connection therewith) shall not constitute a basis for declaring the occurrence of an Event of Default on the part of Tenant hereunder. In addition, Landlord covenants and agrees not to take any action with respect to any Existing Condition that might in any way interfere with Tenant's use of the Demised Premises without the prior written consent and express authorization of Tenant. Tenant shall procure, pay for and maintain all permits, licenses and other authorizations necessary to operate the Demised Premises, except as otherwise provided herein, and shall pay all costs and expenses incidental to complying with the foregoing matters. So long as the actions of Tenant are not reasonably anticipated to result in a penalty being imposed against the Demised Premises, or any portion thereof, or any penalty or civil or criminal liability against Landlord, or subject the Demised Premises to forfeiture, or cause the Demised Premises to be closed on either a temporary or permanent basis, Tenant shall have the right to contest or review any such order referred to in this Section 9.01 by legal proceedings or in such manner as Tenant may deem advisable and may have any such order cancelled, removed or revoked, without actual compliance therewith. If any such actions or proceedings are instituted by Tenant, they shall be instituted and conducted diligently and in good faith at the expense of Tenant and without cost to Landlord, and in connection with any such contest with respect to the validity or application, in whole or in part, of any such legal requirements, Tenant may, subject to the conditions set forth in the second sentence of this paragraph, postpone compliance therewith pending the determination of such contest, but shall be required to bond or post other equivalent security with the Trustee, to the extent of at least one hundred ten (110%) percent of the contested amount, in order to protect the interest of Landlord hereunder. In the event of any default by Tenant under this section (or if any of the conditions set forth in the second sentence of this paragraph cease to be complied with), Landlord may comply with any such order, regulation, rule or requirement and the cost and expense of so doing may be paid by Landlord and shall be repaid to Landlord by Tenant on demand, as additional rent due hereunder, together with interest thereon at a rate equal to two (2%) percent over the rate of interest that is announced from time to time by Citibank, N.A. as its "prime" or "base" rate (such interest rate being calculated as aforesaid, is hereinafter referred to as the "Penalty Rate"); and if Tenant shall fail promptly so to do, Landlord shall be entitled to obtain such reimbursement and interest from the Trustee out of the security deposited with it. 9.02 At the request of Tenant, Landlord shall be required to join in any and all actions or proceedings referred to in the preceding Section 9.01, in which event any such action or proceeding may be taken by Tenant in the name of, but without expense to, Landlord. Tenant shall serve notice upon Landlord of Tenant's intention to take such action or initiate such proceeding, and Landlord's failure to join in such action or proceeding within ten (10) days from the date of Landlord's deemed receipt of Tenant's notice (in the manner provided by Section 29.01 hereof) shall thereupon constitute the immediate authorization and appointment by Landlord of Tenant to act as Landlord's true and lawful representative and attorney-in-fact, coupled with an interest, with full power and authority in Landlord's name, place and stead to make, execute, sign, acknowledge, and swear, deliver, file and record at the appropriate governmental or other offices or with any appropriate parties, such documents as may be reasonably required by the subject matter of such notice. In connection therewith, Tenant shall indemnify and hold harmless Landlord from and against any and all loss, claim, damage, cost or expense, including, without limitation, reasonable attorneys' fees and disbursements, that Landlord may incur in connection with any such actions or proceedings, any failure of Tenant to comply with any such order or requirement during such contest and any instrument or document executed by Landlord, or by Tenant on behalf of Landlord, pursuant to this Section 9.02. Nothing contained in this Section 9.02 shall be construed as obligating either Landlord or Tenant to take any action with respect to any of the Existing Conditions. 16 ARTICLE 10 INDEMNIFICATION OF LANDLORD; LIMITATION OF LIABILITY 10.01 Except as otherwise provided herein, Tenant shall indemnify and save Landlord harmless from and against, and shall reimburse Landlord for, all liabilities, damages, fines, penalties, claims, costs, and expenses, whether found in tort, in contract or otherwise, including reasonable attorneys' fees and disbursements, which may be imposed upon or incurred or paid by or asserted against Landlord as a result of (but without the fault or negligence of Landlord) the use, misuse, occupancy, possession or unoccupancy of the Demised Premises or negligent or tortious act by Tenant or any other person claiming by, through or under Tenant or their respective agents, employees, licensees, invitees or guests, any Tenant Change and anything done in, on or about the Demised Premises or any part thereof in connection therewith, any accident, injury, death or damage to any person or property occurring in, on or about the Demised Premises or any portion thereof, or any failure on the part of Tenant to perform or comply with any of the provisions contained in this Lease on its part to be performed or complied with. Tenant shall, at its own cost and expense, resist or defend against any and all such actions, claims and demands and shall indemnify Landlord for all costs, expenses and liabilities Landlord may incur in connection therewith if Tenant fails to satisfy its obligations hereunder. 10.02 Except as otherwise provided herein, Tenant shall fully and exclusively control the Demised Premises and be responsible for the condition, operation, repair, replacement, maintenance and management of the Demised Premises. 10.03 If at any time during the term of this Lease Landlord shall fail to perform any covenant or obligation on its part to be performed hereunder or shall otherwise incur any liability to Tenant with respect to any matter pertaining to the Demised Premises, and Tenant shall recover a money judgment against Landlord with respect thereto, such judgment shall be satisfied only (i) out of the proceeds of sale produced upon execution of such judgment and levy thereon against Landlord's interest in the Demised Premises and (ii) by judicial attachment or other legal process with respect to the rents or other income from the Demised Premises receivable by Landlord. The provisions of this Section 10.03 are not intended to relieve Landlord from the performance of any of its obligations hereunder, but rather to limit Landlord's liability in the case of the recovery of a judgment against it, as aforesaid, nor shall any of the provisions of this Section be deemed to limit or otherwise affect Tenant's right to seek enforcement of the remedies of injunctive relief or specific performance. ARTICLE 11 INSURANCE 11.01 Tenant shall, throughout the term of this Lease, at its own cost and expense (including all costs and expenses of recovery, if any), obtain and maintain in full force and effect and in the name of Tenant, Landlord and, if so requested by Landlord, the Fee Mortgagee, as their respective interests may appear: (i) insurance against loss or damage by fire or other casualty, with all risk (including vandalism and malicious mischief) "extended coverage" and such other risks or hazards as are customarily insured against in the applicable locality at the time in connection with premises of similar type to the Demised Premises, including, without limitation, damage by lightning, hail, explosion, windstorm, tornado, cyclone, riot, disorder or civil commotion, smoke damage, vandalism and malicious mischief (when obtainable and if not included in "extended coverage"). Such insurance shall be in an amount sufficient to prevent Landlord or Tenant from becoming a co-insurer within the terms of the applicable policies, but in no event shall such policies be in an amount of less than ninety (90%) percent of the full replacement value of the Demised Premises. Such insurance shall contain inflation guard and increased cost of construction endorsements covering the Demised Premises (including, without limitation, the structure of the Building) and all replacements, additions and improvements 17 thereof, and of all fixtures, elevators, equipment and other personal property therein, in amounts sufficient to prevent Landlord or Tenant from becoming a co-insurer under the terms of the applicable policies, and in no event shall any such policy be in an amount less than ninety (90%) percent of the full replacement cost thereof from time to time; (ii) general liability insurance written on a so-called "Comprehensive" General Liability Insurance Form for the mutual benefit of Landlord, Tenant and the Fee Mortgagee, covering the Demised Premises against claims on account of bodily injury, death and property damage incurred upon or about the Demised Premises, inclusive of the elevators therein, such insurance to be written with limits of not less than Ten Million ($10,000,000) Dollars for death or injuries to one or more persons from one occurrence, and not less than Three Million ($3,000,000) Dollars for damage to property; (iii) adequate explosion insurance with respect to steam and pressure boilers and similar apparatus, if any, located on the Demised Premises; (iv) insurance against loss or damage to the Demised Premises resulting from water damage, if reasonably obtainable; (v) war risk insurance as and when such insurance is obtainable from the United States Government or any agency or instrumentality thereof, and a state of war or national public emergency exists or threatens, in an amount not less than the full insurable value of the Demised Premises; (vi) worker's compensation insurance subject to statutory limits or better in respect of any work or other operations on or about the Demised Premises; (vii) business interruption insurance, in an amount sufficient to enable Tenant to pay all rental amounts that are from time to time due to Landlord with respect to the Demised Premises for a period of one (1) year; (viii) such other types of insurance with respect to the Demised Premises and in such amounts as Landlord from time to time may reasonably request against such other insurable hazards which at the time in question are commonly insured against (and are obtainable for the Demised Premises at commercially reasonable rates) in the case of property similar to the Demised Premises; and (ix) during the performance of any construction with respect to any Tenant Change at a cost in excess of One Hundred Thousand ($100,000) Dollars, subject to the CPI Adjustment, broad form builder's all-risk insurance, as calculated on a completed value basis. 11.02 All such insurance shall: (i) be obtained from and maintained with reputable and financially sound insurance company(ies) authorized to issue such insurance in the State of New York; (ii) be reasonably satisfactory to Landlord and to the Fee Mortgagee; (iii) contain an agreement by the insurer that it will not cancel or modify any such policy except after fifteen (15) days prior written notice to Landlord and the Fee Mortgagee; (iv) provide that any loss otherwise payable thereunder shall be payable notwithstanding any act or negligence of Landlord or Tenant which might, absent such agreement, result in a forfeiture of all or part of the payment of such loss; and 18 (v) state on the face of the policy that Landlord is not and shall not become liable for payment of premiums thereunder. 11.03 All proceeds payable pursuant to any of the policies referred to in this Article 11, on account of the loss involved, except any such proceeds payable pursuant to general liability insurance coverage directly to an injured party, as described in Section 11.01(ii) hereof, shall be payable over to a trustee (the "Trustee"), who shall be an Institutional Lender (as defined in Section 13.01 hereof) other than the Fee Mortgagee and appointed by Tenant (and whose costs and expenses shall be borne by Tenant), it being agreed that such proceeds shall be held in trust by the aforesaid Trustee for the purposes hereof and shall be invested by the Trustee in certificates of deposit or treasury bills, as the Trustee shall in its reasonable discretion determine, and any interest which accrues thereon or any amounts earned as a result of such investment shall become part of the proceeds, after subtracting therefrom an administrative fee payable to the Trustee, as well as any costs and expenses paid or incurred by the Trustee in connection with its investment of the proceeds. In the case of reconstruction of the Demised Premises, such proceeds shall be disbursed by the Trustee in the manner provided by Section 12.03 hereof. 11.04 Prior to the expiration of any such insurance policy, Tenant shall deliver to Landlord a certificate evidencing the replacement or renewal thereof. Tenant shall furnish Landlord and the Fee Mortgagee with duplicate original(s) or original certificate(s), together with true copy(ies) of all such insurance policies, including renewal and replacement policy(ies), together with written evidence that the premiums therefor have been paid. It is understood and agreed that said policies may be blanket policies covering other locations operated by Tenant, its affiliates or subsidiaries, provided that such blanket policies otherwise comply with the provisions of this Article 11, and provided further that such policies specifically allocate coverage for the Demised Premises in accordance with the requirements of this Article 11. 11.05 Tenant shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be furnished by Tenant under Article 11 of this Lease, unless Landlord and any Fee Mortgagee designated by Landlord are included as named insured, with loss payable as provided in this Article 11. Tenant shall immediately notify Landlord whenever any such separate insurance is taken out and shall deliver to Landlord duplicate original(s) thereof, or original certificate(s) evidencing the same with true copies thereof, as provided in this Lease. ARTICLE 12 DAMAGE OR DESTRUCTION 12.01 If any portion of the Demised Premises is damaged or destroyed by fire or other cause during the term of this Lease, Tenant shall promptly give notice thereof to Landlord, and Tenant shall, except as otherwise provided herein, be obligated to repair, replace and rebuild (collectively, "Repair") the same, notwithstanding the sufficiency or availability of insurance proceeds and, if the insurance proceeds received by Tenant with respect to any such damage or destruction of the Demised Premises are not sufficient to Repair the Demised Premises (or damaged portion thereof), then Tenant will be required to most the deficiency with the Trustee and such amounts shall be disbursed for reconstruction purposes pursuant to Section 12.02 hereof. In connection therewith, the Demised Premises shall be restored at least to the extent of the value, and as nearly as possible to the character and size dimensions (e.g., square footage) of the property involved, as it was immediately before the loss, to the extent permissible by applicable zoning regulations. Notwithstanding the foregoing, in the event of any such damage or destruction which affects more than twenty five (25%) percent of the Demised Premises and which shall take place at any time during the five (5) year period immediately preceding the Expiration Date of this Lease, and, if Tenant shall then be in compliance with the insurance requirements of Section 11.01 hereof and shall not have taken or failed to take any action which results in its insurance carrier being entitled to and in fact disclaiming liability for the loss in question, then Tenant may elect not to commence or otherwise complete the Repair of the damaged or destroyed portion of the Demised Premises and, in such event, Tenant's sole obligation to Landlord will be to deliver the Demised Premises to Landlord, together with an assignment of Tenant's right to receive any insurance proceeds in respect of such damage or destruction to all or any portion of the Demised Premises and any insurance proceeds 19 in Tenant's possession and received in respect of the damage or destruction in question, net of any and all sums theretofore expended by Tenant, if any, in connection with the Repair of such condition, in which event, this Lease shall be deemed terminated and of no further force and effect. Any Repairs performed by Tenant in connection with this Article 12 shall be done in a first class workmanlike manner, and in accordance with the provisions of Article 6 hereof. 12.02 Subject to the terms of the currently existing Fee Mortgage (as defined and specifically referred to in Section 21.01 hereof), for the purpose of paying towards the cost of such Repair, the Trustee shall, pursuant to the terms of Section 11.03 hereof, hold in trust all insurance proceeds which may be received by said Trustee and any amount deposited by Tenant with the Trustee pursuant to Section 12.01, and shall disburse such proceeds and amount in the case of Repairs or specific Tenant Changes, in the manner provided by Section 12.03 hereof. 12.03 The aforesaid insurance proceeds and any amount deposited by Tenant with the Trustee pursuant to Section 12.01, shall be paid by the Trustee to Tenant in payment for the proportionate amount of costs and expenses theretofore incurred ("Proportionate Amount") that the fund from time to time held by the Trustee bears to the estimated full cost of the Repair in question with respect to work and materials actually incorporated in the Demised Premises from time to time, in installments, as the making of the Repair work progresses, upon the requisition certificates of Tenant and a licensed architect retained by Tenant to supervise the Repair. Each such requisition certificate shall set forth (i) a description of all work performed since the last requisition certificate was submitted to the Trustee, (ii) an estimate of the cost of the remaining work to be performed to complete the Repair and (iii) a statement of the architect that such requisition is not being submitted for work that has been previously performed and paid for from the insurance proceeds or other amount held by the Trustee and that the work in question has been properly performed. If any mechanic's lien is filed against the Demised Premises, Tenant shall not be entitled to receive any further installment until such lien is satisfied, discharged of record or otherwise bonded against collection from against the Demised Premises. The insurance proceeds and any other amount in the hands of the Trustee shall not be reduced below the amount specified by Tenant's architect in the certificates furnished with each draw request as the amount required to complete the Repairs. If the amount of such insurance proceeds and any other amount shall be in excess of the cost of any Repairs undertaken by Tenant, such excess shall be paid to Tenant; provided, however, that if an Event of Default on the part of the Tenant with respect to its monetary obligations hereunder shall have occurred and then be continuing, such excess shall first be applied to cure such Event of Default and the remainder shall be paid to Tenant. To the extent that any insurance proceeds or other amount held in escrow by the Trustee shall be made available to Tenant to pay for its costs of making such repairs, restoration, rebuilding and replacements; said payments shall be made only under the condition that the Trustee be assured that at all times the Demised Premises shall be free of liens or claims of liens by reason of such work, or that any liens or claims of liens existing against the Demised Premises shall be bonded against collection from against the Demised Premises and provided further that the Proportionate Amount of the portion of the proceeds and other amounts paid out at any time shall not exceed the Proportionate Amount of the value of the actual work and materials incorporated in the repaired, restored, rebuilt or replaced Demised Premises and the conditions described in Article 6 are complied with. Tenant shall hold in trust all insurance proceeds and any other amounts disbursed to Tenant by the Trustee, which proceeds and any other amounts shall be used solely to pay for the costs of reconstruction to effect the Repair of the Demised Premises. Notwithstanding the foregoing, if an Event of Default on the part of Tenant has occurred and is then continuing under this Lease, the Trustee shall make no further payment of insurance proceeds or any other amounts to Tenant unless and until such Event of Default has been cured, it being understood that in the event this Lease is terminated as a result of such Event of Default prior to commencement or completion of the Repair in question, the amount of insurance proceeds and any other amounts then held by the Trustee which are required to complete the Repair in question shall be paid to Landlord; provided, however, that in no event whatsoever will any insurance proceeds attributable to any of Tenant's Property be paid to Landlord. 20 12.04 In the event of any damage to or destruction of the Demised Premises, Tenant shall promptly notify Landlord and the Fee Mortgage and shall make prompt proof of loss to the relevant insurance company(ies). Tenant is hereby authorized, in the exercise of its sole and absolute discretion, to settle or otherwise compromise and directly collect the proceeds of any and all insurance claims on behalf of all interested parties, provided that all such proceeds are applied to the reconstruction of the Demised Premises; provided, however, that if such damage or destruction shall occur at any time during the five (5) year period immediately preceding the Expiration Date of this Lease and Tenant shall elect not to effect the Repair of the Demised Premises, as provided in Section 12.01 hereof, then Landlord shall thereupon have the right to settle and compromise such insurance claims and the provisions of the immediately following paragraph shall not apply. At the request of Tenant, Landlord shall be required to join in any and all actions, proceedings or settlements with respect to the collection of such proceeds, in which event any such action, proceeding or settlement may be taken or made by Tenant in the name of, but without expense to Landlord. Tenant shall serve notice upon Landlord of Tenant's intention to take such action, initiate such proceeding or make such settlement,and Landlord's failure to join in such action, proceeding or settlement within ten (10) days from the date of Landlord's deemed receipt of Tenant's notice in the manner provided by Section 29.01 hereof shall thereupon constitute immediate authorization and appointment by Landlord of Tenant to act as Landlord's true and lawful representative and attorney-in-fact coupled with an interest, with full power and authority in Landlord's name, place and stead to make, execute, sign, acknowledge, and swear, deliver, file and record at the appropriate governmental or other offices or with any appropriate parties, such documents as may be reasonably required by the subject matter of such notice. In connection therewith, Tenant shall indemnify and hold harmless Landlord from and against any and all loss, claim, damage or expense, including, without limitation, reasonable attorneys' fees and disbursements, that Landlord may incur in connection with any such action, proceeding or settlement and any instrument or document executed by Landlord, or by Tenant on behalf of Landlord, pursuant to this Section 12.04. 12.05 The provisions and requirements of Article 6 hereof shall apply with respect to any repairing, restoring, rebuilding or replacing made pursuant hereto; and same shall be made in accordance with the Plans and Specifications (copies of which Tenant shall cause to be delivered to Landlord) to the extent same is practicable. Notwithstanding anything contained herein to the contrary, Tenant's obligation to effect the Repair (as defined in Section 12.01) of the Demised Premises shall be reduced and abated to the extent, if any, that the Fee Mortgagee under the existing Fee Mortgage is permitted to and actually requires that any insurance proceeds be paid to and retained by such Fee Mortgagee instead of being applied in payment of the cost of such Repair. Landlord will use its reasonable efforts to induce the Fee Mortgagee to make such proceeds available to Tenant for purposes of making Repairs in the manner provided herein. It is expressly agreed, however, that any refinancing of the existing Fee Mortgage and any other Fee Mortgage hereafter placed against the Demised Premises shall in all events expressly provide for the payment of all insurance proceeds to Tenant for than purpose of effecting Repairs of the Demised Premises in accordance with such reasonable procedures (which may include a requirement that such Fee Mortgagee hold and disburse the insurance proceeds in lieu of the Trustee) as such Fee Mortgagee shall agree to in order to effectively carry out the provisions of this Article 12, and such procedures shall supersede those provided for in this Article 12. 12.06 Landlord and Tenant shall each look first to any insurance in its favor before making any claim against the other party for recovery for loss or damage resulting from fire or other casualty, and to the extent that such insurance is in force and collectible and to the extent permitted by law, Landlord and Tenant each hereby releases and waives all right of recovery against the other or any one claiming through or under each of them by way of subrogation or otherwise. The foregoing release and waiver shall be in force only if both releasor's insurance policies contain a clause providing that such a release or waiver shall not invalidate the insurance and also, only if such clause can be obtained without additional premiums. Each party hereto shall notify the other if it is unable to obtain from its respective insurance carrier such a clause or if such clause is only available at additional cost. 21 12.07 Tenant hereby agrees that, notwithstanding any damage or destruction to the Demised Premises or any portion thereof as described herein, Tenant shall not be relieved of its obligation to pay to Landlord the Rent due hereunder for its use of the Demised Premises-(and/or its use of Additional Space, as described below) unless and until this Lease is terminated (unless such termination is due to the existence of an Event of Default on the part of Tenant hereunder); provided, however, that the additional rent payable hereunder with respect to the Additional Space (to the extent and for so long as the existing term(s) of the L.P. and/or the Larama Leases shall remain in effect) shall be reduced and/or abated to the extent provided by the provisions of Article 9 of the L.P. Lease and/or Article 9 of the Larama Lease. ARTICLE 13 CONDEMNATION 13.01 If at any time during the term of this Lease, the whole or substantially all of the Demised Premises shall be taken or condemned (a "Taking") for any public or quasi-public purpose by any lawful power or authority, by the exercise of the right of condemnation or eminent domain or by agreement between Landlord and those authorized to exercise such right, this Lease and the term hereof shall terminate and expire on the date of such Taking and the Rent and other sums of money and charges herein reserved and provided to be paid by Tenant shall be apportioned and paid by Tenant to the date of such Taking. If this Lease shall be terminated in accordance with this Section 13.01, compensation from the award (the "Award") made in such Taking shall be distributed in the order of priority as indicated below: (i) First, to the Qualified Fee Mortgagee (as such capitalized term is hereafter defined), up to the amount of the then outstanding principal balance of the Fee Mortgage, but not more than the Qualified Fee Mortgage Amount (as such capitalized term is hereafter defined); and (ii) The balance of the Award shall be apportioned and distributed between Landlord and Tenant in such manner and amount as they may mutually agree upon or, if they fail to reach agreement with respect thereto, then such apportionment shall be resolved by appraisal of the respective interests of Landlord and Tenant (giving due consideration to the distribution referred to in clause (i) above) in accordance with the provisions of Section 25.04 hereof. For purposes of this Article 13, a Qualified Fee Mortgagee shall be deemed to mean an "Institutional Lender" (as hereinafter defined) that is the holder of a Fee Mortgage, affecting the Demised Premises (but only to the extent that the outstanding principal balance of such Fee Mortgage does not exceed eighty (80%) percent of the fair market value of the Demised Premises on a free and clear basis immediately prior to the condemnation in question, as determined by appraisal in accordance with the procedures set forth in Section 25.04 hereof, such amount being referred herein as the Qualified Fee Mortgage Amount) and which mortgage does not require the payment of installments of debt service thereunder on an annual basis in an amount that is greater than one-hundred ten (110%) percent of the annual Rent that is payable hereunder at the time in question. For purposes of this Section 13.01, an "Institutional Lender" shall be deemed to mean the holder of a first mortgage that is a bank, savings bank, savings and loan association, trust company, insurance company, real estate investment trust, university, one of the foregoing acting as a trustee, teacher's retirement or pension fund, pension or retirement fund covering employees of a government or governmental authority or subdivision or agency or public corporation, or other investing entity having total assets or endowment of not less than Two Hundred Fifty Million ($250,000,000) Dollars and generally referred to and acknowledged in the New York City real estate industry to be an "institutional lender" or "institutional investor". 13.02 If a Taking shall occur with respect to twenty-five (25%) percent or more of the Demised Premises, or all reasonable means of ingress and egress to and from the Demised Premises are permanently eliminated by reason of any such Taking, then and in any of such events, Tenant shall have the right, exercisable by written notice delivered to Landlord within sixty (60) days after such Taking, to terminate this Lease and upon delivery of the foregoing 22 notice to Landlord, this Lease and the term hereof shall cease and the Fixed Rent and other charges payable by Tenant hereunder shall be apportioned and paid to the date of the Taking. If this Lease is terminated in accordance with this Section 13.02, Tenant shall be entitled to its share of the Award determined in accordance with the procedures set forth in Section 13.01 hereof. 13.03 If there shall be a Taking not resulting in the termination of this Lease as aforesaid, the term hereof shall not be reduced or affected in any way, and: (i) Tenant shall be entitled to the percentage of the Award to which it would be entitled under Section 13.01 hereof that is equivalent to the percentage of the Demised Premises so taken and to a Tenant's Improvements Award to the extent Tenant's Improvements are in fact taken. (ii) Tenant shall apply the portion of the Award that it receives pursuant to the preceding clause (i) to restore, to the extent reasonably possible, the remaining portions of the Demised Premises to its former condition. (iii) The Fixed Rent payable for the balance of the term of this Lease shall be equitably and proportionately reduced from the date of the Taking, based on the reduction, from time to time, in the square foot floor area of the Demised Premises occasioned thereby. (iv) Except to the extent that Tenant may be prevented from so doing pursuant to the terms of the order of the condemning authority, Tenant shall perform and observe all of the terms, covenants, conditions and obligations hereof upon the part of Tenant to be performed and observed, as though such Taking had not occurred. 13.04 In the event of any Taking, Landlord shall immediately notify Tenant and Tenant shall have the absolute right to participate in the condemnation proceedings, including, without limitation, any and all negotiations or litigation with the condemning authority and Landlord shall at all times cooperate with Tenant in connection therewith. 13.05 Nothing contained herein shall be construed to preclude Tenant from prosecuting any additional claim directly against the condemning authority in such condemnation proceedings for loss of business, depreciation or damage to and/or cost of removal or the value of, stock and/or trade fixtures, furniture and other personal property belonging to Tenant, but only provided that any award made in respect of any such claim is not in diminu- tion of any portion of the Award for the Main Parcel, the Elevator Shaft Parcel or the Building. ARTICLE 14 REMOVAL OF TENANT'S PROPERTY 14.01 Except as hereinafter provided, all of Tenant's permanent improvements or alterations to the Demised Premises (collectively, the "Tenant Improvements") shall become the property of Landlord following the expiration of the term of this Lease. 14.02 Tenant shall have the right, at any time during the term of this Lease, to remove "Tenant's Property", consisting of machinery, trade equipment, business and trade fixtures and other trade equipment placed, installed, supplied or made by it in or on the Demised Premises, at Tenant's cost and expense (without any contribution or reimbursement therefor by Landlord), and which may be removed, provided that Tenant shall be liable for the cost of repairing any damage to the Demised Premises caused as a result of Tenant's removal of Tenant's Property. As used herein and hereinafter, the term Tenant's Property shall not include or be deemed to include any item now or hereafter installed in or on the Demised Premises that is an integral part thereof, including, without limitation, heating, ventilating, and air conditioning plants and systems, electrical and plumbing fixtures and systems, the elevators situated on the Elevator Shaft Parcel and other like equipment and fixtures, if any. 23 ARTICLE 15 LANDLORD'S RIGHT TO PERFORM TENANT'S COVENANTS AND CURE TENANT'S DEFAULTS; TENANT'S RIGHT TO PERFORM LANDLORD'S COVENANTS AND CURE LANDLORD'S DEFAULTS 15.01 If Tenant shall at any time fail to satisfy any of the monetary charges or obligations for which Tenant is responsible hereunder in the manner and to the extent provided herein or shall otherwise fail to bond adequately the collection against the Demised Premises of any Tax or other monetary charges or expenses, then Landlord, without waiving or releasing Tenant from any of its obligations hereunder, may at its option serve a notice to Tenant providing that if Tenant does not pay any such sum on Tenant's part to be paid as provided herein within ten (10) days after Tenant's deemed receipt of such notice (as provided by Section 29.01 hereof), then Landlord shall have the right but not the obligation to pay such amount on behalf of Tenant. In the event that Landlord gives any such notice, Landlord shall thereupon become responsible for properly paying such sum, and Tenant agrees to reimburse Landlord upon demand (as additional rent) for the amount of any such payments made by Landlord on Tenant's behalf and such amounts shall constitute items of additional rent payable hereunder and shall be paid by Tenant to Landlord on written demand, together with interest thereon at the Penalty Rate (as that term is defined in Section 9.01 hereof) computed from the date such funds are advanced by Landlord until reimbursed by Tenant. If Tenant does not reimburse Landlord for any such sums so expended by Landlord on behalf of Tenant, together with interest thereon, within ten (10) days after Tenant's deemed receipt (in accordance with Section 29.01 hereof) of the aforesaid written demand for payment, then an Event of Default (as defined in Article 19 hereof) on the part of Tenant hereunder will be deemed to have occurred. If Tenant shall at any time fail to satisfy any of the non-monetary obligations on its part to be performed hereunder and has not begun the process of complying with or curing any such matter, or is not otherwise diligently pursuing such compliance or cure to completion, and if such failure to perform on the part of Tenant causes an emergency situation to exist, then Landlord shall thereupon have the right to enter the Demised Premises without notice for the express limited purpose of effecting the cure of such non-monetary obligation. In the event that Landlord takes any such action, Landlord shall thereupon become responsible for properly performing such act and, in the case of any repairs to the Demised Premises, or any portion thereof, Landlord shall be obligated to cause any work to be performed in good and workmanlike manner, in compliance with all applicable permits and authorizations and building and zoning laws, ordinances, rules and requirements of all federal, state, and municipal government authorities, and Tenant agrees to reimburse Landlord upon demand (as additional rent) for the amount of any such payments made by Landlord on Tenant's behalf and such amounts shall constitute items of additional rent payable hereunder and shall be paid by Tenant to Landlord on written demand, together with interest thereon at the Penalty Rate (as that term is defined in Section 9.01 hereof) computed from the date such funds are advanced by Landlord until reimbursed by Tenant. 15.02 If Landlord shall at any time fail to make any payment or perform any act on its part to be made or performed hereunder beyond any applicable grace period (including, without limitation, its obligation to pay all Taxes with respect to the Adjacent Parcel), and Landlord has not cured such default or has not commenced and is not diligently proceeding to cure same, then Tenant, without waiving or releasing Landlord from any of its obligations hereunder, may at its option and upon not less than ten (10) days prior written notice (and without any notice in the case of an emergency), pay any sum or perform any act on Landlord's part to be paid or performed as provided herein. Landlord agrees to reimburse Tenant upon demand for all amounts expended by Tenant with respect to the foregoing and all out-of-pocket expenses incurred or payments made in connection with the foregoing, which amounts shall bear interest at the Penalty Rate from the date of their disbursement or payment by Tenant until reimbursed by Landlord. The amount of any payment made or expense incurred by Tenant in connection with Landlord's failure to pay Taxes on the Adjacent Parcel shall be set-off against any future rent or other payments due by Tenant under this Lease. ARTICLE 16 DISCHARGE OF LIENS 24 16.01 Tenant will not create, permit to be created or otherwise allow the continued existence of any lien, encumbrance or charge upon the Demised Premises, or any part thereof, or the income therefrom, having any priority or preference over this Lease or ranking on a parity with the estate, right and interest of Landlord in the Demised Premises, or the Land, or any part thereof, or the income therefrom. Tenant covenants and agrees to cause the prompt discharge of record of any and all such matters and will not suffer any matter or thing whereby the estate, right and interest of Landlord might be impaired except as expressly provided in this Lease. 16.02 If, as a result of action or inaction by Tenant, any mechanic's, laborer's or materialmen's lien shall at any time be filed against any part of the Demised Premises, Tenant shall cause the same to be discharged of record within thirty (30) days after the notice of the filing thereof by payment, deposit, bond, order of a court of competent jurisdiction or otherwise. 16.03 All materialmen, contractors, artisans, mechanics, laborers and any other persons who now or hereafter have contracted with Tenant for the furnishing of any labor, services, materials, supplies or equipment with respect to any portion of the Demised Premises at any time from the date hereof until the end of the term of this Lease, are hereby charged with notice that they must look exclusively to Tenant to obtain payment for the same. ARTICLE 17 LANDLORD'S ACCESS TO DEMISED PREMISES 17.01 Landlord and its duly authorized representatives shall have the right to enter the Demised Premises at reasonable times after business hours (unless an emergency requires Landlord's access during business hours), upon giving to Tenant reasonable prior written notice under the circumstances, for the purpose of: (i) inspecting the conditions of same, and making such repairs, alterations, additions, or improvements thereto as may be necessary by reason of Tenant's failure to make any repairs or perform any work required of Tenant pursuant to the terms of this Lease. Nothing contained herein shall imply any duty of Landlord to make any such inspections, repairs, alterations, additions, or improvements unless expressly otherwise provided in this Lease; (ii) exhibiting the same (but only between the hours of 11:00 a.m. and 3:00 p.m.) to persons who may wish to purchase or mortgage the same; and (iii) during the one (1) year period preceding the Expiration Date (as the same may be extended by properly exercised Renewal Option(s)), exhibiting the same to persons who may wish to lease the same and placing a notice of reasonable size on the Demised Premises offering the same or any part thereof for rent. ARTICLE 18 ASSIGNMENT, SUBLETTING AND CONTROL 18.01 If this Lease be assigned, or if the Demised Premises, or any part thereof, be sublet or occupied by anybody other than Tenant, Landlord may, upon the occurrence and during the continuance of an Event of Default on the part of Tenant hereunder, collect rent from the assignee, subtenants or occupants of Tenant, and apply the net amount collected in reduction of the rent reserved herein, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of the requirements and restrictions hereafter set forth regarding the subletting of the Demised Premises or the assignment of this Lease, or the acceptance of the assignee, subtenant or occupants of Tenant, or a release of Tenant from the further performance by Tenant of its obligations under the provisions of this Lease. 18.02 With respect to any subletting or assignment of all or any portion of Tenant's interest under this Lease and the leasehold estate created hereby, the following matters, to the extent hereinafter set forth, shall be complied with: 25 (i) Any assignee shall assume, by written, recordable instrument, the due performance of all Tenant's prospective obligations under this Lease; provided, however, that Tenant shall not thereby be released from liability hereunder. In connection with such assumption, Landlord shall be required to deliver to such assignee a landlord's estoppel certificate addressed to such party and otherwise in compliance with the requirements of Article 23 hereof. If Landlord fails to deliver such certificate within thirty (30) days after Tenant's (or such assignee's) request therefor, then the same shall be deemed given and to constitute a certification to the extent and in the manner so provided by Article 23 hereof. (ii) Such assignment and/or subletting shall be subject to all the provisions, terms covenants and conditions of this Lease. (iii) Each sublease under the provisions of this Article 18 shall provide that (a) such sublease is subject and subordinate to all of the terms, covenants and conditions of this Lease and to all of the rights of Landlord hereunder and shall not extend beyond the Expiration Date of the term of this Lease and (b) in the event this Lease shall terminate before the expiration of such sublease, the subtenant thereunder will (but only if and to the extent that Landlord agrees not to disturb the tenancy of such subtenant so long as such subtenant is not in default beyond any applicable grace period with respect to the performance of its obligations under the provisions of such sublease), at Landlord's option, attorn to Landlord and waive any rights the subtenant may have to terminate the sublease or to surrender possession thereunder, as a result of the termination of this Lease. 18.03 Tenant may mortgage its leasehold interest under this Lease, provided that same is subject and subordinate to the interest of Landlord and the present or any future Fee Mortgagee in the Demised Premises and that same does not violate the provisions of any loan documents supplied to Tenant evidencing or securing such Fee Mortgage(s) of Landlord's interest in and to the Demised Premises. Tenant agrees to execute, in recordable form, such instruments as may be reasonably required from time to time in order to confirm such subordination. Landlord expressly undertakes to furnish to Tenant, upon request, copies of any Fee Mortgage affecting the Demised Premises as well as any and all supportive documentation pertaining thereto. 18.04 The interest of Tenant hereunder may be assigned or sublet in its entirety, or all or substantially all of the outstanding capital stock of Tenant sold, without Landlord's prior consent, to an assignee, subtenant or purchaser, if such person or entity will have a net worth immediately after such sale in an amount that is equal to or greater than the lesser of the net worth of Tenant as of (a) the date immediately preceding such transaction or (b) the date hereof. Notwithstanding the foregoing, Tenant shall expressly have the right to effect an assignment of its entire interest under this Lease to the then current management of the business conducted at the Demised Premises without Landlord's consent or complying with any requirement imposed by this Section 18.04. Tenant shall expressly have the right, without obtaining Landlord's consent or complying with any requirement imposed by this Section 18.04, to cause the management of the business conducted at the Demised Premises to be carried out under a management agreement arrangement, whereby Tenant may enter into a management agreement with an Affiliate, (as hereinafter defined) of itself for the management of the Demised Premises. Such Management Agreement may provide, among other matters, for the payment of such management fees as Tenant shall deem appropriate for the performance of management services. In connection with the foregoing, Tenant shall expressly have the right, without obtaining Landlord's consent or complying with any requirement imposed by this Section 18.04, to assign this Lease to a corporation substantially all of the capital stock of which is owned by the members of the health club facility conducted at the Demised Premises (and/or Tenant or an Affiliate of Tenant). 18.05 With Landlord's prior written consent, which consent may not be unreasonably withheld, Tenant may assign all of its interest in the Lease, or sublet all or any portion of the Demised Premises to any person or entity that does not satisfy the requirements of Section 18.04 hereof. In addition, Landlord hereby agrees to indemnify and hold harmless Tenant from and against any and all liability, loss, cost, injury, damage or other expense whatsoever that 26 Tenant may incur as a result of Landlord's failure to give its consent hereunder, in the event that it is finally determined by a court of competent jurisdiction that Landlord's failure to give any such consent was unreasonable. 18.06 Notwithstanding the provisions of the preceding Section 18.05, Tenant may, without Landlord's prior written consent: (a) assign all or sublet any portion of its interest in and to this Lease and the Demised Premises to an Affiliate of itself; (b) sublet any portion of the Demised Premises to any party for the purpose of continuing to use the sublet portion for the same purpose as such portion of the Demised Premises so sublet was used prior to such subletting (e.g., as a restaurant/night club with respect to the space currently occupied by Larama, as a garage with respect to the space currently occupied by L.P., or as a restaurant with respect to the third floor restaurant space); (c) sublet any portion of the Demised Premises to any person or entity for any use or operation that is related to the primary current use of the Demised Premises (e.g., as a sports clothing and/or sports equipment boutique, massage or physical therapy service, or aerobic dance center); (d) the aggregate of space within the Demised Premises to be further sublet from and after the date hereof pursuant to subparagraphs (b) and (c) above shall be limited to not more than thirty (30%) percent of the Demised Premises; provided, however, that the Additional Space presently covered by each of the Existing Leases shall be excluded for all purposes from any and all calculations made pursuant to this Section 18.06(d) in connection with the determination of such limitation. For purposes of this Article 18, the term "Affiliate" shall mean, with respect to a specific entity, any natural person, or any firm, corporation, partnership, association, trust or other entity which, directly or indirectly, controls, or is under common control with such entity. For purposes hereof, the term "control" shall mean the possession, directly or indirectly (and, in the case of a corporation, of at least fifty-one (51%) percent of all classes of voting stock of the corporation in question) of the power to direct or cause the direction of the management and policies of any such entity, whether through the ownership of voting securities, by contract, or otherwise. ARTICLE 19 DEFAULT 19.01 The occurrence and continuance of any one or more of the following events shall be deemed to constitute an "Event of Default" hereunder: (i) Tenant shall default with respect to the payment of any Rent payable under this Lease or any other sum when and as the same shall become due and payable, and such default shall continue for a period of ten (10) days after Tenant's deemed receipt of written notice from Landlord specifying such default, which notice shall be delivered in accordance with Section 29.01 hereof; (ii) Tenant shall default with respect to the performance or compliance with any of the agreements, terms, covenants or conditions on the part of Tenant to be performed under the provisions of this Lease (other than those referred to in the foregoing subsection 19.01(i) hereof) for a period of thirty (30) days after Tenant's deemed receipt of notice from Landlord specifying the items in default, which notice shall be delivered in accordance with Section 29.01 hereof, or in the case of any such default or condition which is susceptible of being cured but which cannot with due diligence be cured within said thirty (30) day period, if Tenant fails to proceed within said thirty (30) day period to commence to cure the same and thereafter to prosecute the curing of such default with due diligence (provided, however, that the time period within which Tenant may cure a default susceptible of being cured but which cannot with due diligence be cured within said thirty (30) day period shall be extended for such period as may be necessary to complete the same with all due diligence); 27 (iii) if Tenant shall commence or institute any case, proceeding or other action (x) seeking relief on its behalf as debtor, or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (y) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, or if Tenant shall make a general assignment for the benefit of creditors; (iv) if any case, proceeding or other action shall be commenced or instituted against Tenant (x) seeking to have an order for relief entered against it as debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, or (y) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, which either (1) results in any such entry of an order for relief, adjudication of bankruptcy or insolvency or such an appointment or the issuance or entry of any other order having a similar effect or (2) remains undismissed for a period of one hundred twenty (120) days, or if any case, proceeding or other action shall be commenced or instituted against Tenant seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its property which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within one hundred twenty (120) days from the entry thereof; (v) if Tenant shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in subsections (iii) or (iv) above; (vi) if a trustee, receiver or other custodian is appointed for any substantial part of the assets of Tenant which appointment is not vacated or effectively stayed within thirty (30) business days; or (vii) if the Demised Premises shall be abandoned by Tenant or shall become vacant during the term of this Lease. Upon the occurrence and during the continuance of an Event of Default on the part of Tenant, Landlord shall have the right to deliver to Tenant, in accordance with Section 29.01 hereof, a final notice specifying the date and time on which the Lease will be effectively terminated, which date shall not be less than ten (10) days from the date on which Tenant shall be deemed to have received such notice pursuant to Section 29.01 hereof, and on the date specified in such notice this Lease shall expire with the same force and effect as though the date so specified were the date herein originally fixed as the Expiration Date, and all rights of Tenant under this Lease shall expire but Tenant shall remain liable as hereafter provided. 19.02 Upon any expiration or termination of this Lease pursuant to the provisions of Section 19.01 hereof, Tenant shall quit and peacefully surrender the Demised Premises to Landlord and Landlord, upon, or at any time after any such expiration or termination, may, without further notice, enter upon and re-enter the Demised Premises and possess and repossess itself thereof, by force, summary proceedings, ejectment or otherwise, and may dispossess Tenant and remove Tenant and all other persons and property from the Demised Premises and may have, hold and enjoy the Demised Premises and the right to receive all rental income of and from the same. Promptly after any such expiration or termination, Landlord shall be required to use reasonable efforts in order to relet the Demised Premises, or any part thereof, in the name of Landlord or otherwise, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term of this Lease) and on such conditions (which, may include concessions or free rent) as Landlord, in the exercise of its commercially reasonable business judgment, may determine and may collect and receive the rents therefor, which 28 sums shall be applied in the discharge of any surviving monetary obligations of Tenant to Landlord hereunder. The provisions of this paragraph shall survive any such expiration or termination of this Lease. No such expiration or termination of this Lease shall relieve Tenant of Tenant's liability and obligations under this Lease, and such liability and obligations shall survive any such expiration or termination. In the event of any such expiration or termination, Tenant shall pay to Landlord the Rent and all other charges required to be paid by Tenant up to the time of such expiration or termination of this Lease. Thereafter, and until the end of what would have been the term of this Lease in the absence of such expiration or termination (but only if and to the extent that Landlord continues to comply with and perform its obligations under the provisions of the immediately preceding paragraph), Tenant shall be liable to Landlord for and shall pay to Landlord as and for liquidated damages for Tenant's default, the equivalent of the amount of the Rent and other charges which would be payable under this Lease by Tenant if this Lease were still in effect, less the net proceeds of any re-letting effected pursuant to the provisions of this subsection 19.02, after deducting all of Landlord's reasonable expenses in connection with such re-letting, including, without limitation, all reasonable repossession costs, brokerage and management commissions, operating expenses, legal expenses, reasonable attorneys' fees, alteration costs, and expenses of preparation for such re-letting. In no event shall Tenant be entitled to receive any proceeds of reletting if such proceeds exceed the amount owed by Tenant to Landlord hereunder. Tenant shall pay such liquidated damages (herein called "deficiency") to Landlord monthly on the days on which the Fixed Rent and additional rent would have been payable under this Lease if this Lease were still in effect and Landlord shall be entitled to recover from Tenant each monthly deficiency as the same shall arise. 19.03 No failure by Landlord or Tenant to insist upon the strict performance by the other respective party of any covenant, agreement, term or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent by Landlord during the continuance of any such breach on the part of Tenant, shall constitute a waiver of any such breach or of such covenant, agreement, term or condition. No covenant, agreement, term or condition of this Lease to be performed or complied with by either party and no breach thereof, shall be waived, altered or modified except by a written instrument executed by the other party. No waiver of any breach shall affect or alter this Lease but each and every covenant, agreement, term and condition of this Lease shall contin- ue in full force and effect with respect to any other then existing or subsequent breach thereof. 19.04 Tenant hereby expressly waives, to the extent permitted by law, the service of any notice of intention to re-enter or notice to quit provided for in any statute (other than notices expressly provided for herein), or of the institution of legal proceedings to that end, and Tenant, for and on behalf of itself and all persons claiming through or under Tenant, also waives any and all right of redemption or re-entry or repossession or to restore the operation of this Lease in case Tenant shall be dispossessed by a judgment or by warranty of any court or judge or in the case of re-entry or repossession by Landlord or in the case of any expiration or termination of this Lease. 19.05 It is expressly agreed that the failure of Tenant to take any action in order to effect the cure of any Existing Conditions shall not be considered a default by Tenant with respect to the performance of its obligations hereunder and shall in no event whatsoever constitute the basis for the occurrence of an Event of Default on the part of Tenant hereunder. ARTICLE 20 QUIET ENJOYMENT Landlord hereby represents and warrants to Tenant that it has full right, power and authority to enter into this Lease for the term herein granted and Landlord covenants and agrees with Tenant that upon Tenant's paying the Rent and other charges due hereunder, and observing and performing all the terms, covenants and conditions on Tenant's part to be observed and performed, Tenant may peaceably and quietly enjoy the Demised Premises, free from any interference, molestation or acts of Landlord or any corporate or other entity that controls, is controlled by 29 or is under common control with Landlord or of anyone claiming by, through or under Landlord or any party affiliated with Landlord, subject, nevertheless, to the terms and conditions of this Lease. ARTICLE 21 SUBORDINATION 21.01 This Lease is subject and subordinate only to a first priority fee mortgage (the "Fee Mortgage") affecting Landlord's interest in the Demised Premises being currently held by Citibank, N.A. (the "Fee Mortgagee"). Landlord will use reasonable efforts to deliver to Tenant, simultaneously with the execution and delivery hereof, an amended non-disturbance agreement in the form annexed hereto as Exhibit H, duly executed and acknowledged by the Fee Mortgagee, with respect to the estate of Tenant under this Lease. Notwithstanding the foregoing, Landlord hereby agrees not to take any actions that might cause the existing non-disturbance agreement heretofore executed by the Fee Mortgagee not to continue to remain in full force and effect in the event that the aforesaid amended non-disturbance agreement is not obtained. This Lease will also be subject and subordinate to all renewals, modifications, consolidations, replacements and extensions of the Fee Mortgage; provided, however, that any successor to the Fee Mortgagee or any other holder of a replacement shall be required to agree, in addition to those matters referred to in Section 12.05 hereof, in a separate instrument delivered to Tenant, either to the provisions substantially as set forth in Exhibit H annexed hereto or as follows: (i) that in the event of foreclosure, the holder of such mortgage will cause the sale of the Demised Premises in any foreclosure action to be made subject to this Lease, provided that no Event of Default on the part of Tenant has occurred and is then continuing; (ii) that such mortgagee or anyone acquiring the Demised Premises through or under such mortgagee will not disturb the possession of Tenant during the term of this Lease or any extension hereof other than upon the occurrence and during the continuance of an Event of Default on the part of Tenant here under; provided, however, that if an Event of Default on the part of Tenant has occurred and shall be continuing at the time of such foreclosure, then upon the cure of such Event of Default prior to the entry of an order of foreclosure under such mortgage, the non-disturbance covenant referred to herein shall be deemed to be reinstated in all respects and the terms and provisions of this Lease shall continue to remain in full force and effect unless and to the extent otherwise provided herein; (iii) that Tenant will attorn to such mortgagee (and to any purchaser of such mortgagee's interest in and to the Demised Premises at a foreclosure sale); provided, however, that such mortgagee or purchaser shall not be bound by (a) any amendment to this Lease not consented to by such mortgagee, (b) any prepayment of Rent hereunder for a period in excess of thirty (30) days or (c) any claims or offsets against a prior holder of the Landlord's interest hereunder; and (iv) such mortgage shall provide (or the holders thereof, shall separately agree) that so long as an Event of Default on the part of Tenant has not occurred and is continuing, the proceeds of any insur- ance coverage with respect to the Demised Premises payable by reason of fire or other insured casualty shall first be applied in payment of the cost of restoring the Demised Premises after such injury or taking (in accordance with such procedures as may be reasonably approved by such mortgagee), before any part of such proceeds shall be applied on account of any part of such mortgage indebtedness. The lien of any mortgage shall not cover any trade fixtures or other personal property paid for and installed in the Demised Premises by Tenant (or any persons claiming under Tenant) without any contribution or reimbursement therefor by Landlord. 21.02 The aforesaid provisions shall be self-operative and no further instrument of subordination shall be required. In the event Landlord desires confirmation of the provisions of this Article, Tenant shall execute, promptly and without charge therefor, any instrument, in recordable form, that Landlord may reasonably request in order to confirm the foregoing matters. However, if Tenant shall fail to execute any such instrument, in recordable form, within twenty (20) days after Tenant's deemed receipt (in the manner provided by Sec- tion 29.01 hereof) of 30 Landlord's notice of request therefor, such inaction shall thereupon constitute the immediate authorization and appointment by Tenant of Landlord to act as Tenant's true and lawful attorney-in-fact, coupled with an interest, with full power and authority in Tenant's name, place and stead to make, execute, sign, acknowledge, and swear, deliver, file and record at the appropriate governmental or other offices or with any appropriate parties, an instrument, in recordable form, setting forth the foregoing matters. In connection therewith, Landlord shall indemnify and hold harmless Tenant from and against any and all loss, claim, damage, cost or expense, including, without limitation, reasonable attorneys' fees and disbursements, that Tenant may incur as a result of any provision specifically set forth in such subordination (and with respect to which Tenant would not otherwise incur liability under this Lease). 21.03 Notwithstanding the foregoing, should the Fee Mortgagee or any substitute or successor holder of a fee mortgage covering Landlord's interest in the Demised Premises require that this Lease be prior rather than subordinate to the Fee Mortgage or any other applicable mortgage, Tenant shall promptly upon request therefor by Landlord or such mortgagee, and without charge therefor, execute a document effecting and/or acknowledging such priority. ARTICLE 22 BROKERAGE Landlord and Tenant each represents and warrants to the other that it has dealt with no brokers with respect to entering into this Lease and that neither party nor its respective representatives has done any acts, had any negotiations or conversations, or made any agreements or promises which will in any way create or give rise to any obligation or liability for the payment of any fee, charge, commission or other compensation to any broker or finder with respect to this Lease. Landlord and Tenant each agrees to forever indemnify, defend and save harmless the other of, from and against any and all claims or suits for compensation, commission and/or otherwise which may be asserted or made by any broker, person or entity for bringing about this Lease as a result of any dealings by each respective party or its representatives with such other broker, person or entity, including, without limitation, all costs, losses, liabilities, damages and expenses (including, without limitation, reasonable attorneys' fees and disbursements) related thereto. ARTICLE 23 LEASE STATUS; LANDLORD'S AND TENANT'S CERTIFICATES Landlord and Tenant shall, each without charge at any time and from time to time during the term of this Lease, within fifteen (15) days after receipt of a request from the other party, certify by written instrument, duly executed, acknowledged and delivered to the other party hereto or to any other party specified by Landlord or Tenant, as the case may be: (i) That this Lease is unmodified, that the same is in full force and effect if such then be the case (or, if there has been modification, that the same is in full force and effect, if such then be the case, as modified and stating the modifications) and certifying that this Lease is a true and exact copy of the Lease between the parties hereto; (ii) To the best of its knowledge, whether or not there are then existing any breaches or defaults by the other party under any of the terms of this Lease and specifying such breach or default or any setoffs or defenses against the enforcement of any of the agreements, terms, covenants or conditions of this Lease upon the part of the Landlord or Tenant, as the case may be, to be performed or complied with (and, if so, specifying the same and the steps being taken to remedy the same); and (iii) The dates, if any to which the rental(s) and other charges under this Lease have been paid in advance. If Landlord or Tenant shall at any time fail to deliver to the other any such certification within the aforesaid time period, such failure shall be deemed to constitute an affirmation that this Lease is unmodified, in full force and effect 31 without default on the part of Landlord or Tenant and that each of the matters referred to in the aforesaid items (i), (ii), and (iii) shall in all respects be true and correct without restriction or exception. ARTICLE 24 HOLDOVER After the expiration of the term of this Lease if not extended, or extended term, if extended, if Tenant shall continue in possession thereafter and Landlord shall accept the payment of Rent hereunder, such possession shall be on a month-to-month basis upon the same terms of this Lease until terminated at the end of a month by either party upon thirty (30) days advance written notice to the other party. ARTICLE 25 RENEWAL OPTIONS 25.01 Tenant shall have the option (the "First Renewal Option") to extend the term of this Lease for an additional period ("First Renewal Term") of ten (10) years commencing on the day immediately succeeding the Expiration Date, and terminating on the tenth anniversary of the Expiration Date. The First Renewal option must be exercised by written notice ("First Renewal Notice") sent by Tenant to Landlord by certified or registered mail, return receipt requested, not later than eighteen (18) months prior to the Expiration Date. Any termination, cancellation or surrender of Tenant's interest in this Lease during the original term hereof shall terminate Tenant's right to exercise the First Renewal Option. Tenant's right to exercise the First Renewal Option shall not apply upon the occurrence and/or during the continuance of an Event of Default on the part of Tenant hereunder. Upon delivery of the First Renewal Notice by Tenant in accordance with the terms hereof, this Lease shall thereupon be deemed renewed for the First Renewal Term with the same force and effect as if the First Renewal Term had originally been included in the term of this Lease, and this Lease, as extended, shall be upon the same terms, covenants and conditions as are contained herein, except that (i) the amount of Fixed Rent payable during the First Renewal Term (with respect to the entire Demised Premises, inclusive of the Additional Space) shall be equal to the higher of (a) the amount determined by mutual agreement of the parties hereto at least four (4) months prior to the commencement of the First Renewal Term or by appraisal as hereinafter provided and (b) the amount of Fixed Rent (inclusive of rent payable for all Additional Space) payable during the last year of the original term of this Lease (the "Prior Fixed Rent"), and shall be payable as provided below and (ii) the number of renewal terms shall be reduced from two (2) to one (1), which remaining renewal term is described and defined below as the "Second Renewal Term". In addition, any default or Event of Default that has occurred and that shall be continuing as of the expiration of the original term of this Lease shall continue to constitute a default or Event of Default upon the commencement of the First Renewal Term. If the parties hereto fail to agree upon the amount of Fixed Rent payable during the First Renewal Term (with respect to the entire Demised Premises, inclusive of the Additional Space) at least four (4) months prior to the expiration of the original term of this Lease, the Fixed Rent shall be the amount determined by appraisal in accordance with the provisions of Section 25.04 hereof to be the fair market rental value of the Demised Premises (inclusive of the Additional Space), such fair market rental value to be determined on the basis of (a) the use being made of the Demised Premises at the date hereof or (b) the use being made of the Demised Premises immediately prior to the expiration of the original term of this Lease, whichever yields the higher value, and considering the terms and conditions of this Lease; provided, however, that in no event shall the Fixed Rent during the First Renewal Term be less than the Prior Fixed Rent. The amount of Rent payable during the First Renewal Term shall thereafter be increased after the expiration of five (5) lease years from and after the date of the commencement of the First Renewal Term, by the CPI Adjustment; provided, however, that for purposes of making such calculation the Base Year shall be deemed to be the last lease year of the original term and such adjustment shall be made with reference to the then expiring lease year (which new Rent shall be payable on an annual basis for the remaining five (5) lease year period until 32 expiration of the First Renewal Term). In no event shall the Fixed Rent be reduced pursuant to the provisions of this paragraph. Upon Tenant's exercise of its option to extend the term of this Lease for the First Renewal Term, Landlord and Tenant, upon demand by either party, shall execute and deliver an instrument in recordable form, setting forth the new expiration date of the term of this Lease. 25.02 If the term of this Lease shall have been duly extended for the First Renewal Term, Tenant shall have the option (the "Second Renewal Option") to extend the term of this Lease for an additional period ("Second Renewal Term" and, together with the First Renewal Term, being hereinafter sometimes collectively referred to as the "Renewal Terms") of ten (10) years commencing on the day immediately succeeding the Expiration Date of the First Renewal Term, and terminating on the tenth anniversary of the Expiration Date of the First Renewal Term. The Second Renewal Option must be exercised by written notice ("Second Renewal Notice") delivered by Tenant to Landlord by certified or registered mail, return receipt requested, not later than eighteen (18) months prior to the Expiration Date of the First Renewal Term. Any termination, cancellation or surrender of Tenant's interest in this Lease during the original term (or First Renewal Term) hereof shall terminate Tenant's right to exercise the Second Renewal Option. Tenant's right to exercise the Second Renewal Option shall not apply upon the occurrence and/or during the continuance of an Event of Default on the part of Tenant hereunder. Upon delivery of the Second Renewal Notice by Tenant in accordance with the terms hereof, this Lease shall thereupon be deemed renewed for the Second Renewal Term with the same force and effect as if the Second Renewal Term had originally been included in the term of this Lease, and this Lease, as extended, shall be upon the same terms, covenants and conditions as are contained herein, except that (i) the amount of Fixed Rent payable during the Second Renewal Term (with respect to the entire Demised Premises, inclusive of the Additional Space) shall be equal to the higher of (a) the amount determined by mutual agreement of the parties hereto at least four (4) months prior to the commencement of the Second Renewal Term or by appraisal as hereinafter provided and (b) the amount of Fixed Rent payable during the last year of the First Renewal Term, and shall be payable as provided below and (ii) there shall be no additional renewal terms. In addition, any default or Event of Default that has occurred and that shall be continuing as of the expiration of the First Renewal Term shall continue to constitute a default or Event of Default upon the commencement of the Second Renewal Term. If the parties hereto fail to agree upon the amount of Fixed Rent payable during the Second Renewal Term (with respect to the entire Demised Premises, inclusive of the Additional Space) at least four (4) months prior to the expiration of the First Renewal Term, the Fixed Rent shall be the amount determined by appraisal in accordance with Section 25.04 of this Lease to be the fair market rental value of the Demised Premises (inclusive of the Additional Space), such fair market rental value to be determined on the basis of (a) the use being made of the Demised Premises at the date hereof or (b) the use being made of the Demised Premises immediately prior to the expiration of the First Renewal Term, whichever yields the higher value, and based upon the terms and conditions of this Lease; provided, however, that in no event shall the Fixed Rent during the Second Renewal Term be less than the Fixed Rent payable during the last year of the First Renewal Term. The amount of Fixed Rent payable during the Second Renewal Term shall thereafter be increased after the expiration of five (5) lease years from and after the date of commencement of the Second Renewal Term, by the CPI Adjustment; provided, however, that for purposes of making such calculation the Base Year shall be deemed to be the final lease year of the First Renewal Term and such adjustment shall be made with reference to the then expiring lease year (which new Rent shall be payable on an annual basis for the remaining five (5) lease year period until expiration of the Second Renewal Term). In no event shall the Fixed Rent payable hereunder be reduced pursuant to the provisions of this paragraph. Upon Tenant's exercise of its option to extend the term of this Lease for the Second Renewal Term, Landlord and Tenant, upon demand by either party, shall execute and deliver to each other an instrument in recordable form, setting forth the new expiration date of the term of this Lease. 33 25.03 If the Fixed Rent applicable to the first lease year of either or both of the Renewal Terms shall not have been determined at or prior to the respective commencement dates thereof, then until such determination is made Tenant shall continue to pay the Fixed Rent (inclusive of the rent for the Additional Space) payable by Tenant immediately prior to commencement of such Renewal Term. Upon a determination by the appraisers of the Fixed Rent applicable to the Renewal Term in question, Tenant shall forthwith pay to Landlord any deficit represented by the difference between the monthly installments of Fixed Rent actually paid for such Renewal Term and the monthly installments of Fixed Rent as so determined for the same period by the appraisers with respect to such Renewal Term (or, if higher, the Fixed Rent, inclusive of Rent payable for the Additional Space, during the last year of the preceding term). 25.04 Either Landlord or Tenant may submit any question required by the provisions hereof to be presented to binding appraisal by written notice to that effect to the other party and shall in such notice appoint a disinterested person of at least ten (10) years experience as a real estate appraiser, who shall be a member of a recognized society of appraisers and shall have had experience in appraising major commercial properties located in the City of New York, as appraiser on its behalf. Within thirty (30) days thereafter, the other party shall by written notice to the first party appoint a second disinterested person possessing like qualifications as appraiser on its behalf. The two (2) appraisers thus appointed shall then appoint a third disinterested appraiser possessing the aforesaid qualifications. Each of the three (3) appraisers thus appointed shall, within thirty (30) days after the appointment of the third appraiser, submit to Landlord and Tenant a written appraisal setting forth such appraiser's determination with respect to the question presented, provided that: (i) if the second appraiser shall not have been appointed as aforesaid, the first appraiser shall alone proceed to determine such matter, and such sole appraiser shall then submit to Landlord and Tenant a written appraisal setting forth such appraiser's determination with respect to the question presented within thirty (30) days after the thirty (30) day period for the appointment of the second appraiser shall have lapsed; and (ii) if the two (2) appraisers appointed by the parties shall be unable to agree, within fifteen (15) days after the appointment of the second appraiser, on the appointment of a third appraiser, they or either of them shall give written notice of such failure to agree to Landlord and Tenant, and, if Landlord and Tenant fail to agree upon the selection of such third appraiser within fifteen (15) days after the appraisers appointed by Landlord and Tenant give such notice, then either of Landlord and Tenant, upon written notice to the other of them, may request such appointment by the American Arbitration Association in New York, New York (or any successor thereto), or on its failure, refusal or inability to act, may apply for such appointment to the then President of the Association of the Bar of the City of New York. The final determination of the question presented shall be equal to the numerical average of the two (2) appraised determinations which are the closest; provided, however, that if the average of the three (3) appraised determinations shall result in an amount which is the same as the appraised determination that is the median of the three (3), the final determination of the question presented shall in such case be equal to such median appraised determination; and provided further, however, that if the second party shall not have chosen an appraiser, the final determination of the question presented shall be equal to the determination of the sole appraiser. The determination made as above provided shall be conclusive upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof. Each party shall pay the fees and expenses of the appraiser appointed by such party and one-half (1/2) of the fees and expenses of the third appraiser and the other fees and expenses of the appraisal properly incurred hereunder. Tenant further agrees to provide all information, documents or data reasonably requested by any appraiser appointed hereunder. 25.05 Notwithstanding the foregoing, at any time during the term of this Lease but, if Tenant shall have exercised the First Renewal Option, not less than twenty-four (24) months prior to the expiration of the First Renewal Term, Landlord shall have the right by giving notice (the "Cancellation Notice") to Tenant to cancel this Lease (such cancellation in no event to be effective prior to expiration of the First Renewal Term) for the express 34 limited purpose of tearing down, razing, substantially rehabilitating or demolishing the Building and rebuilding on the site of the Building, or integrating same with a new structure to be built on the 328 Site following the demolition or substantial rehabilitation of the structure presently situated thereon. The preceding provisions of this Section 25.05 shall, in all events, be subject to Tenant's right to continue to occupy the Demised Premises throughout the original term of this Lease and throughout the First Renewal Term in the event that Tenant duly exercises the First Renewal Option. This Lease and the term hereof shall cancel and terminate on the date set forth in the Cancellation Notice as if such date was the Expiration Date of this Lease; provided, however, that Tenant, if it shall have exercised the First Renewal Option, may continue to remain in possession of the Demised Premises until the later of (a) the expiration of the First Renewal Term or (b) the date set forth for the termination of this Lease in the Cancellation Notice. 25.06 In the event that Landlord determines, subsequent to the serving upon Tenant of the Cancellation Notice that Landlord no longer intends to raze, tear down, demolish or substantially rehabilitate the Building in order to rebuild on the site of the Building or integrate same with a new structure, Landlord may withdraw such Cancellation Notice by notice delivered to Tenant in accordance with the provisions of Section 29.01 hereof; provided, however, that if Tenant shall have exercised the First Renewal Option and the Cancellation Notice is withdrawn by Landlord during the last five (5) years of the First Renewal Term, Tenant shall then have the right, at its option, to either exercise the Second Renewal Option as provided in Section 25.02 (or, if fewer than 18 months shall remain in the First Renewal Term, to exercise such option within 60 days after Landlord's withdrawal of the Cancellation Notice), and continue to remain in possession under this Lease or terminate this Lease on the date fixed in the Cancellation Notice. If Tenant elects so to terminate this Lease, then Tenant shall have no further liability under this Lease upon the effective date of the termination hereof and Landlord shall indemnify and save Tenant harmless from and against any and all liability, loss, cost, injury, damage or other out-of-pocket expense of any nature whatsoever that Tenant may incur or become subject to as a result of its receipt of the Cancellation Notice, whether or not Tenant determines to surrender the Demised Premises and terminate this Lease as a result thereof; such indemnification shall also apply to any and all out-of-pocket costs and expenses incurred by Tenant with respect to relocating the conduct of its business to another location in the event that Landlord elects, after delivery to Tenant of the Cancellation Notice, not to raze, tear down, demolish or substantially rehabilitate the Building and Tenant nevertheless elects to terminate the Lease and surrender the Demised Premises to Landlord as above provided. 25.07 Promptly following the termination of this Lease pursuant to the provisions of Section 25.06, but only if Tenant shall have exercised the First Renewal Option, Landlord must demolish or so alter the character and function of the Demised Premises such that the same may not, except as hereinafter provided, thereafter be utilized as a health club, unless the Cancellation Notice is withdrawn by Landlord at least one (1) year prior to the termination date of the Lease set forth in such Cancellation Notice and Tenant nevertheless elects to terminate this Lease in accordance with the terms of the Cancellation Notice as originally given to Tenant. In the event that Landlord does reopen or use the Demised Premises as a health club or related facility (other than a health club facility for use primarily by the residential tenants of such structure and their guests) within twenty-four (24) months after the termination of this Lease under the provisions of Section 25.06, Landlord shall be liable to Tenant, if Tenant shall have exercised the First Renewal Option, for an amount equal to the rental value of a health club facility that is substantially identical to the Demised Premises, assuming that the lease covering such facility would have had a remaining term of at least ten (10) years at the time of determining such rental value. Such rental value shall be determined by appraisal in accordance with the procedures provided by Section 25.04 hereof. The provisions of this Section 25.07 shall survive the expiration or sooner termination or cancellation of this Lease. ARTICLE 26 SURRENDER OF PREMISES At the expiration or sooner termination of the term of this Lease, Tenant shall surrender the Demised Premises in the same condition as the same were in upon delivery of possession thereto under this Lease, reasonable wear and tear and damage by fire, other casualty and the elements excepted, and shall surrender all keys for the Demised 35 Premises to Landlord at the place then fixed for the payment of rent and shall inform Landlord of all combinations on locks, safes and vaults, if any, in the Demised Premises. Tenant shall at such time surrender all unutilized insurance proceeds and claims therefor, and shall assign to Landlord its right to receive any future insurance proceeds with respect to the Demised Premises. Tenant shall remove all Tenant's Property in accordance with the provisions of Article 14 hereof, and any and all of such property not so removed shall, at Landlord's option, become the exclusive property of Landlord or may be disposed of by Landlord. ARTICLE 27 SIGNS Tenant may, during the term of this Lease, upon obtaining any and all necessary permits from the appropriate governmental authorities, paint or erect and maintain, at its cost and expense, signs of such dimensions and materials relating to Tenant's business as it may deem appropriate in or about the Demised Premises. Such signs shall, at the option of Landlord, be removed by Tenant upon the termination of its occupancy of the Demised Premises, and Tenant shall be liable for and shall repair any damage to the Demised Premises caused by such removal. ARTICLE 28 WAIVER OF TRIAL BY JURY Landlord and Tenant each hereby waive trial by jury in any action, proceeding or counterclaim brought by either against the other upon any matters whatsoever arising from or in connection with this Lease, Tenant's use or occupancy of the Demised Premises, except in the case of claims of injury or damage. ARTICLE 29 MISCELLANEOUS PROVISIONS 29.01 Notices. All notices, demands and requests under this Lease shall be in writing and shall be sent by United States registered or certified mail, postage prepaid, return receipt requested, or by reputable overnight courier service, and addressed as follows: To Tenant: Vertical Fitness and Racquet Club, Ltd. c/o Health and Tennis Corporation of America, Inc. Suite 2810 2029 Century Park East Los Angeles, California 90067 Attention: Mr. Tom White with copies to: Miller & Seeger 60 East 42nd Street New York, New York 10165 Attention: Israel G. Seeger, Esq. Lurie, Sklar & Simon, Ltd. 180 North Michigan Avenue Chicago, Illinois 60601 Attention: Michael L. Sklar, Esq. Skadden, Arps; Slate, Meagher & Flom 919 Third Avenue 36 New York, New York 10022 Attention: Benjamin F. Needell, Esq. To Landlord: Hirschfeld Realty Club Corporation 336 East 61st Street New York, New York 10021 Attention: Mr. Abraham J. Hirschfeld -and- 328 E. 61 Corp. 336 East 61st Street New York, New York 10021 Attention: Mr. Abraham J. Hirschfeld with a copy to: Hirschfeld Realty 336 East 61st Street New York, New York 10021 Attention: Mr. Elie Hirschfeld Notice, demands and requests delivered by Tenant to either 328 or Hirschfeld (at the addresses provided herein or such other addresses designated by such parties pursuant to the provisions hereof), shall be deemed to have been served or given to Landlord for all purposes under this Lease. Either party may, by notice given to the other party, designate a new address to which notices, demands and requests shall be sent and, thereafter, any of the foregoing shall be sent to the address most recently designated by such party. Notices, demands and requests which shall be served upon Landlord or Tenant (a) if sent by registered or certified mail in the manner as aforesaid, shall be deemed to have been served or given for all purposes under this Lease three (3) business days after such notice, demand or request shall be sent in the manner provided herein or (b) if sent by reputable overnight courier, shall be deemed to have been served or given for all purposes under this Lease on the date of actual delivery or rejection of such a properly addressed notice, demand or request. 29.02 Consents. Any consent or approval required of either of the parties hereto under the terms of this Lease shall be deemed given if not objected to within thirty (30) days of the delivery of the notice requesting such consent or approval. 29.03 Entire Agreement. This Lease and the Exhibits attached hereto sets forth the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior understandings, discussions, negotiations and representations, if any, with respect thereto. No subsequent amendment to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by Landlord and Tenant. 29.04 Binding Effect; Successors and Assigns. Subject to the terms and conditions of this Lease, the covenants, conditions and agreements contained in this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective legal representatives, successors and permitted assigns. 29.05 Invalidity of Particular Provisions. If any term or provision of this Lease or the application thereof to any persons or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term or provision to other persons or circumstances shall not be affected thereby, and each term and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 29.06 Captions. Captions or titles of the sections, paragraphs and subparagraphs of this Lease are inserted solely for convenience of reference and shall not constitute a part of this Lease, nor shall they affect its meaning, construction or effect. 37 29.07 Non-Merger. The leasehold estate created by this Lease shall not merge with the fee estate in the event that the same person or entity acquires, owns or holds, directly or indirectly, the fee estate and the leasehold estate in the Demised Premises. 29.08 Interpretation of Words. A masculine pronoun wherever used herein shall be construed to include the feminine or neuter where appropriate. The singular form wherever used herein shall be construed to include the plural where appropriate and vice versa. 29.09 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 29.10 Further Documents. Each of the parties hereto agrees to execute, acknowledge and deliver or cause to be delivered such other deeds, documents, affidavits and certificates as the other party may from time to time reasonably request in order to confirm this Agreement and the performance of the obligations of such party under the terms hereof or to confirm the expiration or sooner termination of the term of this Lease, in such form as shall be reasonably satisfactory to the other respective party. 29.11 Counterparts. This Lease may be executed in any number of counterparts, each of which shall be deemed an original and all of which shall constitute but one and the same instrument. 29.12 Relationship of the Parties. It is the intention of the parties hereto to create the relationship of Landlord and Tenant, and unless expressly otherwise provided herein, nothing contained herein shall be construed to make the parties hereto liable for any of the debts, liabilities or obligations of the other party. 29.13 Ownership of Leased Premises. Tenant acknowledges that the Demised Premises are the property of Landlord and that Tenant has only the right to the possession and use thereof upon the terms, covenants and conditions set forth in this Lease. Landlord represents claims and liabilities arising out of or resulting from ownership of the Demised Premises subsequent to the effective date of such sale or transfer. IN WITNESS WEEREOF, the parties hereto have duly executed this Lease as of the day and year first above written. ATTEST: HIRSCHFELD REALTY CLUB CORPORATION LANDLORD /s/ ELIE HIRSCHFELD BY: /s/ ABRAHAM HIRSCHFELD - ---------------------------------- --------------------------------- (Assistant) Secretary (Vice) President ATTEST: 328 E. 61 CORP. LANDLORD /s/ ELIE HIRSCHFELD BY: /s/ ABRAHAM HIRSCHFELD - ---------------------------------- --------------------------------- (Assistant) Secretary (Vice) President VERTICAL FITNESS AND RACQUET CLUB, LTD., TENANT 38 ATTEST: /s/ MICHAEL SKLAR BY: /s/ ROY ZURKOWSKI - ---------------------------------- --------------------------------- (Assistant) Secretary (Vice) President Consented TO BY GUARANTOR FOR REMAINING TERM OF GUARANTY HEALTH AND TENNIS CORPORATION OF AMERICA, INC. By: /s/ ROY ZURKOWSKI - ---------------------------------- (Vice) President 39 STATE OF NEW YORK ) : ss. : COUNTY OF NEW YORK ) On the 26th day of March, 1985, before me came Abraham Hirschfeld, to me known, who, being by me duly sworn, did depose and say that he resides at 825 Fifth Avenue, New York, New York; that he is the (Vice) President of HIRSCHFELD REALTY CLUB CORPORATION, the corporation described in and which executed the foregoing instrument by order of the Board of Directors of said corporation and that he signed his name thereto by like order. /s/ JOAN B. MOLLOY --------------------------------- Notary Public JOAN B. MOLLOY Notary Public, State of New York No 4721246 Qualified in Westchester County Commission Expires March 30, 1986 STATE OF NEW YORK ) : ss. : COUNTY OF NEW YORK ) On the 26th day of March, 1985, before me came Elie Hirschfeld to me known, who, being by me duly sworn, did depose and say that he resides at 425 E. 50th Street, New York, New York; that he is the (Assistant) Secretary of HIRSCHFELD REALTY CLUB CORPORATION, the corporation described in and which executed the foregoing instrument by order of the Board of Directors of said corporation and that he signed his name thereto by like order. /s/ JOAN B. MOLLOY --------------------------------- Notary Public JOAN B. MOLLOY Notary Public, State of New York No 4721246 Qualified in Westchester County Commission Expires March 30, 1986 40 STATE OF NEW YORK ) : ss. : COUNTY OF NEW YORK ) On the 26th,day of March, 1985, before me came Abraham Hirschfeld to me known, who, being by me duly sworn, did depose and say that he resides at 825 Fifth Avenue, New York, New York; that he is the (Vice) President of 328 E. 61 Corp., the corporation described in and which executed the foregoing instrument by order of the Board of Directors of said corporation and that he signed his name thereto by like order. /s/ JOAN B. MOLLOY --------------------------------- Notary Public JOAN B. MOLLOY Notary Public, State of New York No 4721246 Qualified in Westchester County Commission Expires March 30, 1986 STATE OF NEW YORK ) : ss. : COUNTY OF NEW YORK ) On the 26th,day of March, 1985, before me came Elie Hirschfeld to me known, who, being by me duly sworn, did depose and say that he resides at 425 E. 5th Street, New York, New York; that he is the (Assistant) Secretary of 328 E. 61 Corp., the corporation described in and which executed the foregoing instrument by order of the Board of Directors of said corporation and that he signed his name thereto by like order. /s/ JOAN B. MOLLOY --------------------------------- Notary Public JOAN B. MOLLOY Notary Public, State of New York No 4721246 Qualified in Westchester County Commission Expires March 30, 1986 41 STATE OF NEW YORK ) : ss. : COUNTY OF NEW YORK ) On the 26th,day of March, 1985, before me came Roy Zurkowski, to me known, who, being by me duly sworn, did depose and say that he resides at 451 Goodhue Road, Bloomfield, Michigan; that he is the (Vice) President of VERTICAL FITNESS AND RACQUET CLUB, LTD., the corporation described in and which executed the foregoing instrument by order of the Board of Directors of said corporation and that he signed his name thereto by like order. /s/ JOAN B. MOLLOY --------------------------------- Notary Public JOAN B. MOLLOY Notary Public, State of New York No 4721246 Qualified in Westchester County Commission Expires March 30, 1986 STATE OF NEW YORK ) : ss. : COUNTY OF NEW YORK ) On the 26th,day of March, 1985, before me came Michael Sklar, to me known, who, being by me duly sworn, did depose and say that he resides at 379 Dell Lane, Highland Park, Illinois; that he is the (Vice) President of HIRSCHFELD REALTY CLUB CORPORATION, the corporation described in and which executed the foregoing instrument by order of the Board of Directors of said corporation and that he signed his name thereto by like order. /s/ JOAN B. MOLLOY --------------------------------- Notary Public JOAN B. MOLLOY Notary Public, State of New York No 4721246 Qualified in Westchester County Commission Expires March 30, 1986 EX-10.66 5 EXHIBIT 10.66 1 EXHIBIT 10.66 LEASE MODIFICATION AGREEMENT JULY 1, 1990 2 LEASE MODIFICATION AGREEMENT AGREEMENT made as of the 1st day of July, 1990, by and among Hirschfeld Realty Cub Corporation, a New York corporation ("Hirschfeld") and 328 E. 61 Corp., a New York corporation ("328" and, together with Hirschfeld, being hereinafter collectively referred to as "Landlord"), As landlord, and Vertical Fitness and Racquet Club, Ltd., a New York corporation, as Tenant ("Tenant"). W I T N E S S E T H : WHEREAS, Landlord and Tenant executed a certain amended and restated lease, dated as of March 26, 1985, (the "Lease") covering the premises therein defined ("Demised Premises"); and WHEREAS, Landlord and tenant are mutually desirous of modifying the Lease upon the terms and subject to the conditions set forth in this settlement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto hereby mutually agree as follows: 1. The Demised Premises shall no longer include the basement floor at 328 East 61st Street; New York, New York, exclusive of mechanical equipment areas and elevator shaft. It is the express intention of the parties that such excluded space (the "Garage") shall be the same space which was occupied by the former garage Tenant until June 30, 1990. 2. All references in the Lease to the garage premises and the and the site thereof shall be deemed deleted and of no further force or affect. The parties acknowledge that Hirschfeld shall have the sole right and responsibility to enter into leases and/or management agreements covering the Garage and to deal with the tenants and/or managers of the Garage, subject, however, to Tenant's continued rights to free access to its elevators, stairs, machinery and equipment in and through the garage, provided same does not unreasonably interfere with the garage business. HIRSCHFELD REALTY CLUB CORPORATION By: /s/ Abraham Hirschfeld --------------------------------- 328 E. 61 Corp. By: /s/ Abraham Hirschfeld --------------------------------- VERTICAL FITNESS AND RACQUET CLUB, LTD. By: /s/ Michael Lucci --------------------------------- President EX-10.67 6 EXHIBIT 10.67 1 EXHIBIT 10.67 VERTICAL CLUB LEASE ASSIGNMENT JANUARY 8, 1996 2 ASSIGNMENT AND ASSUMPTION OF LEASE THIS ASSIGNMENT OF LEASE ("Assignment") is made as of the 8th day of January, 1996, by and between VERTICAL FITNESS AND RACQUET CLUB, LTD., a New York corporation ("Assignor"), and BALLY ENTERTAINMENT CORPORATION, a Delaware corporation ("Assignee"). WHEREAS, Assignor has entered into that certain lease ("Lease") dated March 26, 1985, between Assignor, as tenant, and Vertical Club corporation, as landlord, relating to certain property known as The Vertical Club and located at 330 East 61st Street, New York, New York 10021 (the "Leased Premises"); and WHEREAS, as of the date hereof, Assignor is a wholly owned, indirect subsidiary of Assignee; and WHEREAS, Assignor desires to assign to Assignee all of Assignor's right, title and interest in and to the Lease, and Assignee desires to assume Assignor's right, title and interest in and to the Lease, subject to the provisions of this Assignment and the terms of the Lease. NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Assignor and Assignee hereby agree as follows: 1. Effective as of January 8, 1996, (the "Effective Date"), Assignor does hereby assign to Assignee all of Assignor's right, title and interest in the Lease and Assignor's rights relative to the Leased Premises for the remainder of the term of the Lease, pursuant to the terms of the Lease, including, without limitation, Assignor's right, title and interest in and to all deposits held by the landlord, if any as security for the performance by Assignor of its obligations under the Lease. 2. Effective as of the Effective Date, Assignee hereby accepts the foregoing assignment and, in consideration thereof, Assignee hereby covenants and agrees that, on and after the Effective Date4, Assignee will assume, observe, perform, fulfill and be bound by all terms, covenants, conditions and obligations of the Lease which are to be observed, preformed and fulfilled by the tenant thereunder, in the same manner and to the same extent as if Assignee, instead of Assignor, were originally named therein. 3. Assignee hereby agrees to indemnify, defend and hold Assignor harmless from and against any and all liability, loss, damage, cost and expense, including, without limitation, reasonable attorneys' fees, which Assignor may or shall incur under the Lease by reason of any failure or alleged failure of Assignee to comply with or to perform any and all obligations on its part to be performed or complied with under any of the terms and conditions contained in the 3 Lease which are to be performed on or after the Effective Date. 4. Assignor hereby agrees to indemnify, defend and hold Assignee harmless from and against any and all liability, loss, damage, cost and expense, including, without limitation, reasonable attorneys' fees, which Assignee may or shall incur under the Lease by reason of any failure or alleged failure of Assignor to comply with or to perform any and all obligations on its part to be performed or complied with under any of the terms and conditions contained in the Lease which were to be performed before the Effective Date. 5. The provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment as of the date first written above. ASSIGNOR: VERTICAL FITNESS AND RACQUET CLUB, LTD. A NEW YORK CORPORATION Sign: /s/ Barbara J. Snider By: /s/ Cary A. Gaan ----------------------------- --------------------------------- Print Name: Barbara J. Snider Cary A. Gaan ----------------------- --------------------------------- Its: Senior Vice President -------------------------------- Sign: /s/ Linda B. Motz ---------------------------- Print Name: Linda B. Motz ---------------------- ASSIGNEE: BALLY ENTERTAINMENT CORPORATION, A DELAWARE CORPORATION Sign: /s/ Barbara J. Snider By: /s/ Lee S. Hillman ----------------------------- --------------------------------- Print Name: Barbara J. Snider Lee S. Hillman ----------------------- --------------------------------- Its: Treasurer -------------------------------- Sign: /s/ Linda B. Motz ----------------------------- Print Name: Linda B. Motz ----------------------- EX-10.68 7 EXHIBIT 10.68 1 EXHIBIT 10.68 ASSIGNMENT OF VERTICAL CLUB LEASE APRIL 15, 1998 2 RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO NAME: The Sports Club Company, Inc. ADDRESS: 11100 Santa Monica Boulevard Suite 300 Los Angeles, California 90025 Attention: Real Estate Department - -------------------------------------------------------------------------------- ASSIGNMENT OF LEASE KNOW ALL MEN BY THESE PRESENTS, that HILTON HOTELS CORPORATION, a Delaware corporation having an address at 9336 Civic Center Drive, Beverly Hills, California, hereby assigns to THE SPORTS CLUB COMPANY, a Delaware corporation having an address at 11100 Santa Monica Boulevard, Los Angeles, California, all right, Title and interest of Hilton Hotels Corporation in and to that certain Amended and Restated Net Operating Lease dated as of March 26, 1985, by and among HIRSCHFELD REALTY CLUB CORPORATION and 328 E. 61 CORP., as landlord, and VERTICAL FITNESS AND RACQUET CLUB, LTD., as tenant; Hilton Hotels Corporation is successor to said tenant. Said Amended and Restated Net Operating Lease is evidenced by a Memorandum of Lease and Restrictive Covenants dated as of March 26, 1985 and recorded on April 16, 1985 in New York County Office of the Register of the City of New York, at Reel 898, Page 239. By accepting this Assignment, The Sports Club Company hereby assumes all obligations of the tenant under said Amended and Restated Net Operating Lease. IN WITNESS WHEREOF, Hilton Hotels Corporation has executed this Assignment in form proper and sufficient in law to bind it, as of the 15th day of April, 1998. HILTON HOTELS CORPORATION, a Delaware corporation By: /s/ Richard P. Barrier --------------------------------- Its: Vice President ------------------------------ AGREED TO AND ACCEPTED BY: THE SPORTS CLUB COMPANY, INC., a Delaware corporation By: /s/ David M. Talla ------------------------------------- Its: CEO --------------------------------- EX-10.69 8 EXHIBIT 10.69 1 EXHIBIT 10.69 2ND AMENDMENT TO VERTICAL CLUB LEASE APRIL 15, 1998 2 SECOND AMENDMENT TO AMENDED AND RESTATED NET OPERATING LEASE This SECOND AMENDMENT TO AMENDED AND RESTATED NET OPERATING LEASE (this "AMENDMENT") is made and entered into as of April 15, 1998, by and among HIRSCHFELD REALTY CLUB CORPORATION and 328 E. 61 CORP. (collectively, "LANDLORD"), and THE SPORTS CLUB COMPANY, INC., a Delaware corporation ("TENANT"), with reference to the following recitals: RECITALS: A. Landlord and Vertical Fitness and Racquet Club, Ltd. Entered into that certain Amended and Restated Net Operating Lease (the "RESTATED LEASE") dated as of March 26, 1985, as amended by that certain Lease Modification Agreement (the "FIRST AMENDMENT") dated as of July 1, 1990 (as so amended, the "LEASE"), wherein Tenant leased from Landlord premises commonly known as 330 East 61st Street and 333 East 60th Street, New York, New York, and more particularly described in the Lease. B. Concurrently herewith, Tenant is accepting an assignment of the Lease from Hilton Hotels Corporation, which is the successor by merger to Bally Entertainment Corporation, successor to the tenant named in the Restated Lease. C. Landlord and Tenant desire to amend the Lease as more particularly set forth below. NOW THEREFORE, in consideration of the mutual covenants made herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. DEFINITIONS. All terms defined in the Lease shall have the same meaning when used in this Amendment, unless otherwise specified. 2. REFERENCES TO LEASE. Unless the context requires otherwise, all references to the "Lease" in the Lease shall hereafter be deemed to mean the Lease as amended by this Amendment. 3. FIRST AMENDMENT VOID. The First Amendment is hereby nullified and voided. As a result thereof, all space originally demised pursuant to the Restated Lease is demised to Tenant. 3 4. TERM. Section 1/01 of the Restated Lease is hereby amended to delete "September 30, 2001" therefrom, and to substitute therefor: "December 31, 2020." 5. MEMORANDUM. Simultaneously with the execution hereof, Landlord and Tenant shall each duly execute and acknowledge an amendment to the existing memorandum of lease, in the form of Exhibit 1 to this Amendment (the "Memorandum Amendment"). 6. RENT. (i) The first grammatical paragraph of Section 2.01 of the Restated Lease is hereby deleted in its entirety, and the following is substituted therefor: "2.01 Tenant agrees to pay Landlord a fixed rental ("Fixed Rent") (a) with respect to the period from and after the date hereof and until September 30, 2000, (i) at the rate of $1,008,000 per annum plus (ii) at the rate of an additional $180,000 per annum for the garage plus (iii) a monthly amount equal to the monthly base rent payable by Scores Entertainment, Inc. ("Scores"), including any escalations thereof, under its sublease for a portion of the Demised Premises, whether or not such monthly subrent is actually paid by Scores to Tenant, and (b) with respect to the period from and after October 1, 2000 and until December 31, 2000, (i) at the rate of $1,080,000 per annum plus (ii) at the rate of an additional $180,000 per annum for the garage plus (iii) a monthly amount equal to the monthly base rent payable by Scores, including any escalations thereof, under its sublease for a portion of the Demised Premises, whether or not the such monthly subrent is actually paid by Scores to Tenant, and (c) with respect to the period from and after January 1, 2001 and until December 31, 2001, at the rate of $2,800,000.00 per annum, and (d) with respect to the period from and after January 1, 2002 and until December 31, 2002, at the rate of $3,000,000.00 per annum, and (e) with respect to the period from and after January 1, 2003 and until December 31, 2003, at the rate of $3,200,000.00 per annum, and (f) with respect to the period from and after January 1, 2004 and until December 31, 2004, at the rate of $3,400,000.00 per annum, and (g) with respect to the period from and after January 1, 2005 and until December 31, 2005, at the rate of $3,400,000.00 per annum, and (h) with respect to the period from and after January 1, 2006 and until December 31, 2010, at the rate of $3,720,000.00 per annum, and (i) with respect to the period from and after January 1, 2011 and until December 31, 2015, at the rate of $4,072,000.00 per annum and (j) with respect to the period from and after January 1, 2016 and until December 31, 2020, at the rate of $4,110,720.00 per annum. No rent shall be payable for the garage from and after January 1, 2001. No rent shall be payable with respect to the monthly base rent payable by Scores, including any escalations thereof, under its sublease for a portion of the Demised Premises from and after January 1, 2001." 4 (ii) Section 2.03 of the Restated Lease is hereby deleted in its entirety. 7. USE OF DEMISED PREMISES. The first sentence of Section 3.01 of the Restated Lease is hereby deleted in its entirety, and the following is substituted therefor: "3.01 Subject to and in accordance with all applicable rules, regulations, laws, zoning and other ordinances, statutes and requirements of all governmental authorities and the Fire Insurance Rating Organization and Board of Fire Insurance Underwriters, and any similar bodies, having jurisdiction thereof, Tenant is authorized to and shall be permitted to use the Demised Premises for any lawful purpose, including, without limitation, as a tennis and sport complex, health spa, office space, restaurant, nightclub, cabaret, garage and for the sale of sports and fitness equipment, health foods, vitamins and juices; provided, however, that the use of the Demised Premises shall at all times continue to be commensurate with, at least comparable in quality to and harmonious with the uses made of buildings and improvements in the vicinity of the Demises Premises." 8. CHANGES AND ALTERATIONS. Subsection (i) of Section 6.04 of the Restated Lease is hereby amended to delete "One Hundred Thousand ($100,000) Dollars"; therefrom and to substitute therefor "Two Hundred Thousand ($200,000) Dollars"; and the second sentence of Subsection (vi) of Section 6.04 of the Restated Lease is hereby deleted in its entirety. 9. THE 328 EASEMENT. By its execution hereof, 328 E. 61 Corp. acknowledges and agrees that the 328 Easement Agreement continues in full force and effect for the benefit of Tenant throughout the term of the Lease as extended hereby, and shall continue throughout the term of each duly exercised Renewal Option. Simultaneously with the execution hereof, 328 E. 61 Corp. shall execute, acknowledge and deliver to Tenant for recordation in the City Register's Office an amendment to the 328 Easement Agreement acknowledging the foregoing. 10. ZONING RIGHTS. Article 8 of the Restated Lease is hereby deleted in its entirety, and the following is substituted therefor: "8.01 To the full extent that they may used with respect to the Demised Premises, Landlord hereby transfers to Tenant all excess floor area and/or development rights (collectively, the "Excess Zoning Rights") determined pursuant to the Zoning Resolution of the City of New York, effective as December 15, 1961, as amended on August 17, 1977 (as so amended, or as the same may heretofore have been or hereafter be amended, the "Zoning Resolution") that are appurtenant to the Demised Premises and based upon the Improvements existing thereon as of the date hereof, and Landlord shall have no entitlement thereto during the term of this Lease. Landlord shall, upon reasonable request by Tenant, but at no cost to Landlord, take such 5 actions and execute such documents as Tenant may reasonably deem necessary or desirable in order to confirm the ownership by Tenant of the Excess Zoning Rights." 11. NON-DISTURBANCE. Landlord shall use reasonable efforts to deliver to Tenant a non-disturbance agreement duly executed and acknowledged by the Fee Mortgagee, and/or by any and all mortgagees of Landlord's interest in the Demised Premises, with respect to the estate of Tenant under the Lease, in substantially the form of Exhibit H to the Restated Lease. It shall be a condition to Tenant's obligation pursuant hereto that it receive either all of said non-disturbance agreements or Tenant is otherwise reasonable satisfied as to the priority of the Lease. Landlord hereby represents and warrants that as of the date hereof there is , and on the date of recordation of the Memorandum Amendment there shall be, no Fee Mortgagee or any mortgagee of Landlord's interest in the Demised Premises, 12. RENEWAL OPTIONS. Article 25 of the Restated Lease is hereby deleted in its entirety, and the following is substituted therefor: "25.01 Tenant shall have the option (the "First Renewal Option") to extend the term of this Lease for an additional period (the "First Renewal Term") of five years commencing on the day immediately succeeding the Expiration Date and termination on the fifth anniversary of the Expiration Date. The First Renewal Option must be exercised by written notice (the "First Renewal Notice") sent by Tenant to Landlord by certified or registered mail, return receipt requested, not later than twelve months prior to the Expiration Date. Any termination, cancellation or surrender of Tenant's interest in this Lease during the original term hereof shall terminate Tenant's right to exercise the First Renewal Option, Tenant's right to exercise the First Renewal Option shall not apply upon the occurrence and/or during the continuance of an Event of Default on the part of Tenant hereunder. "Upon delivery of the First Renewal Notice by Tenant in accordance with the terms hereof, this Lease shall thereupon be deemed renewed for the First Renewal Term with the same force and effect as if the First Renewal Term had originally been included in the term of this Lease, and this Lease, as extended, shall be upon the same terms, covenants and conditions as are contained herein, except that the amount of the Fixed Rent payable during the First Renewal Term shall be $4,501,792.00 per annum. "Upon Tenant's exercise of this option to extend the term of this Lease for the First Renewal Term, Landlord and Tenant, upon demand by either 6 party, shall execute and deliver an instrument in recordable form, setting forth the new expiration date of the term of this Lease. "25.02 If the term of this Lease shall have been duly extended for the First Renewal Term, Tenant shall have the option (the "Second Renewal Option") to extend the term of this Lease for an additional period (the "Second Renewal Term," and together with the First Renewal Term, being hereinafter sometimes collectively referred to as the "Renewal Terms") of five years commencing on the day immediately succeeding the Expiration Date of the First Renewal Term, and terminating on the fifth anniversary of the Expiration Date of the First Renewal Term. The Second Renewal Option must be exercised by written notice (the "Second Renewal Notice") delivered by Tenant to Landlord by certified or registered mail, return receipt requested, not later than twelve months prior to the Expiration Date of the First Renewal Term. Any termination, cancellation or surrender of Tenant's interest in this Lease during the original term (or First Renewal Term) hereof shall terminate Tenant's right to exercise the Second Renewal Option. Tenant's right to exercise the Second Renewal Option shall not apply upon the occurrence and/or during the continuance of an Event of Default on the part of Tenant hereunder. "Upon delivery of the Second Renewal Notice by Tenant in accordance with the terms hereof, this Lease shall thereupon be deemed renewed for the Second Renewal Term with the same force and effect as if the Second Renewal Term had originally been included in the term of this Lease, and this Lease, as extended, shall be upon the same terms, covenants and conditions as are contained herein, except that the amount of Fixed Rent payable during the Second Renewal Term shall be $4,931,971.00 per annum. "Upon Tenant's exercise of its option to extend the term of this Lease for the Second Renewal Term, Landlord and Tenant, upon demand by either party, shall execute and deliver to each other an instrument in recordable form, setting forth the new expiration date of the term of this Lease. 13. SIGNS AND PLAQUES. The following is hereby added to Article 27 of the Restated Lease: "Tenant shall have the right of selection of the location, design and size of signage on the interior areas of the Demised Premises and on the exterior areas of the Demised Premises fronting upon Sixtieth and/or Sixty-first Streets. Landlord shall have the right of selection of the location, design and size of signage on the exterior areas of the Demised Premises fronting upon both or either eastern and western exterior exposures. All signage shall be subject to local law. Tenant signage shall be approved by Landlord; Landlord signage shall be approved by Tenant. 7 Neither such approval shall be unreasonably withheld. Landlord agrees that no eastern or western signage will depict or advertise in any fashion any competing or exogenous health club, sports club or athletic club, or any sports or athletic company, or any similar enterprise, or any logo thereof. Landlord and Tenant shall each bear the cost of installation, maintenance and utilities relating to its sign(s), shall at all times maintain them in good condition and repair, and shall promptly repair any damage caused by their removal." "Tenant shall cause plaques honoring Abraham Hirschfeld to be displayed (one) near the main exterior entry and (one) in the main lobby identifying Abraham Hirschfeld as the founder, designer and builder of the Demised Premises." 14. NOTICES. Section 29.01 of the Restated Lease is hereby modified to delete all addresses contained therein, and to substitute therefor the following: To Tenant: The Sports Club Company, Inc. 11100 Santa Monica Blvd., Suite 300 Los Angeles, California 90025 Attn: Michael Talla with copies to: Resch Polster Alpert & Berger LLP 10390 Santa Monica Blvd., 4th Floor Los Angeles, California 90025-5058 Attn: Ronald M. Resch To Landlord: Hirschfeld Realty Club Corporation c/o Hirschfeld Realty, Inc. 328 East 61st Street New York, New York 10021 Attn: Mr. Abe Hirschfeld and to: 328 E. 61 Corp. c/o Hirschfeld Realty, Inc. 328 East 61st Street New York, New York 10021 Attn: Mr. Abe Hirschfeld 15. IMPROVEMENT ALLOWANCE. Landlord shall pay 50% of the hard costs of the construction of such alterations and improvements tot he Demised Premises as Tenant may elect to undertake as Tenant's initial improvements, provided, however, that the aggregate cost of Landlord's share thereof shall in no event exceed $4,000,000.00; within a reasonable time after the execution hereof Tenant shall provide to Landlord a description of its intended scope of said initial improvements (but Tenant shall not be precluded from modifying or expanding the scope 8 thereof). Landlord shall disburse such payments from time to time within fifteen days after Tenant's request therefor, accompanied by conditional lien releases with respect to all invoices to be paid from such disbursement, and unconditional lien releases with respect to all prior disbursements (except to the extent that such unconditional lien releases have theretofore been provided to Landlord). 16. LANDLORD PARKING PRIVILEGES. Landlord shall retain two parking spaces in the Garage, at no charge to Landlord, to be located as Tenant shall from time to time designate. 17. COMPLIMENTARY MEMBERSHIPS. Throughout the term of the Lease, so long as Tenant operates a health and/or fitness club (the "Club") open to the general public for membership at the Demised Premises, Abraham Hirschfeld and all of his descendants (and their spouses), but not exceeding a total of 20 persons, shall receive nontransferable complimentary memberships at the Club, at the highest level of membership available, including without limitation complimentary locker usage, at no charge for monthly dues but otherwise subject to Tenant's rules and regulations for Club membership and the general operations of the Club applied on a non-discriminatory basis, and subject to charges for ancillary services on the same basis that other highest-level Club members are charged therefor. Subject to the terms and conditions of this Section 17, each of the memberships described in this Section 17 shall remain valid so long as such membership is kept in good standing in accordance with the rules of the Club consistently applied. Nothing in this Section 17 shall give any recipient of a membership described in this Section 17 any rights against Tenant if Tenant shall, from time to time, either cease operating the Club or change the manner of its operations, in any such instance for any reason whatsoever. All such memberships shall automatically terminate upon (a) termination of the Lease, (b) any sale of other transfer of the Club by Tenant in any arms'-length transaction, or (c) any sale or other transfer of the Demised Premises by Landlord (or any sale or other transfer of interest in the entities constituting Landlord such that Abraham Hirschfeld or his descendants do not own a controlling interest therein). 18. MISCELLANEOUS CLUB MATTERS. (a) In any public relations releases of Tenant's wherein the history of "The Vertical Club" is recalled or recited, Tenant shall recognize Abraham Hirschfeld as the founder. (b) Tenant shall not use the name "Vertical Club" with respect to any location other than the Demised Premises without first obtaining the Approval of Abraham Hirschfeld; such approval shall not be unreasonably withheld; it being agreed that the Vertical Club is recognized by many newspapers and the media as one of the 7 wonders of the world and, therefore, any additional "Vertical Club" may remove that dignity. (c) After Tenant has completed its contemplated initial improvement to the Demised Premises to be undertaken after the date hereof, Tenant contemplates hosting a party commemorating such completion. Landlord shall have the right to bear 50% of the cost thereof 9 and thereby be a co-host of such party; if Landlord exercises such right, then Tenant shall hold such party and shall also therein commemorate the twentieth anniversary of the original opening of the Club. 19. BROKER. Landlord agrees to pay a brokerage commission to Invescorp International Ltd., and to indemnify, defend and hold Tenant harmless against and from any and all losses, damages, costs and expenses (including, but not limited to, attorneys' fees and costs) incurred by Tenant by reason of any claim for a broker's or finder's fee, owing to Invescorp International Ltd., but no other. Tenant agrees to indemnify, defend and hold Landlord harmless against and from any and all losses, damages, costs and expenses (including, but not limited to, attorneys' fees and costs) incurred by Landlord by reason of any claim for a broker's or finder's fee, if any, owing to The Weatherby Company, but no other. 20. COUNTERPARTS; TIME. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute but one and the same instrument. Time is of the essence of each and every provision hereof. 21. AUTHORIZATION. Each individual and entity executing this Amendment hereby represents and warrants that it has the capacity set forth on the signature pages hereof with full power and authority to bind to the terms hereof the party on whose behalf it is executing this Amendment. 22. APPLICABILITY OF LEASE. Landlord and Tenant intend to effect a novation of the Lease hereby. As an intended consequence thereof, Tenant shall not be responsible for any act, event, occurrence, or non-performance of any obligation on or with respect to the Lease, occurring or accruing prior to the date hereof, and no predecessor of Tenant's with respect to the Demised Premises shall have any liability on or with respect to the Lease after the date hereof. [intentionally left blank] 10 IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized representatives to execute this Amendment as of the date first above written. LANDLORD: HIRSCHFELD REALTY CLUB CORPORATION, a New York corporation, By /s/ Abraham Hirschfeld ----------------------------------------- Its ------------------------------------- 328 E. 61 CORP a New York corporation, By /s/ Abraham Hirschfeld ----------------------------------------- Its ------------------------------------- TENANT: THE SPORTS CLUB COMPANY, INC. a Delaware corporation By /s/ David M. Talla ----------------------------------------- Its CEO ------------------------------------- EX-10.70 9 EXHIBIT 10.70 1 EXHIBIT 10.70 REX & MICHAEL DEAL RM SPORTS MARCH 31, 1998 2 THE SPORTS CLUB COMPANY, INC. 11100 SANTA MONICA BOULEVARD, SUITE 300 LOS ANGELES, CALIFORNIA 90025 March 31, 1998 Mr. Rex A. Licklider Mr. D. Michael Talla 990 Moraga Drive Los Angeles, California 90077 Re: PURCHASE OF HEALTH CLUB Dear Messrs. Licklider and Talla: This letter will confirm our agreement and understanding with respect to the possible acquisition by The Sports Club Company, Inc. (the "COMPANY") of the health and fitness facility described in Exhibit "A" attached hereto (the "CLUB"), and certain related assets and properties, including, without limitation, the assumption of certain contracts and leases (collectively, the "CLUB ASSETS"), for a purchase price of $4,000,000 (the "PURCHASE PRICE"). 1. RM Sports Club, Inc, an entity owned and controlled by each of you ("BUYER"), intends to enter into an Asset Purchase Agreement dated as of _____________, 1998 (the "PURCHASE AGREEMENT"), substantially in the form of Exhibit "B" attached hereto. The Company has engaged in ongoing negotiations with those entities identified in Exhibit "C" attached hereto (the "LANDLORD") with respect to the lease of the building in which the Club is located, the tentative terms and conditions of which are contained in a Second Amendment to Amended and Restated Net Lease (the "LEASE AMENDMENT"). Provided the Company and Landlord are able to reach agreement on the terms of the Lease Amendment, that document must be executed by the Company upon the consummation of the transactions contemplated by the Purchase Agreement. 2. In connection with Buyer's execution and delivery of the Purchase Agreement, you will directly, or will cause Buyer to, deposit with the "Deposit Holder" (as defined in Section 1.5(b) of the Purchase Agreement) an additional amount of cash which, when added to the amounts previously deposited by the Company therewith (the "COMPANY DEPOSIT"), equals One Million Dollars ($1,000,000) (the "PURCHASE DEPOSIT"). 3. Prior to or simultaneously with your depositing, or causing Buyer to deposit, the funds necessary to bring the Purchase Deposit to $1,000,000, you will directly, or will cause Buyer to, reimburse the Company for the full amount of the Company Deposit, without interest. 3 Mr. Rex A. Licklider Mr. D. Michael Talla March 31, 1998 Page 2 4. For valuable consideration, the receipt and adequacy of which are hereby acknowledged, Buyer hereby grants the Company, and the Company hereby accepts, an irrevocable right and option (the "OPTION") to purchase and acquire all of Buyer's rights under the Purchase Agreement for an amount equal to the Purchase Deposit. The Company's right to exercise the Option shall commence on the date hereof and shall continue for a reasonable period of time thereafter during which the Company will conduct its normal due diligence investigation of the Club Assets and the feasibility of developing the Club; provided that, in no event shall the Option be exercisable after the "Outside Closing Date" (as defined in Section 1.9(a) of the Purchase Agreement), which is currently set for Wednesday, April 15, 1998 (the "OPTION EXERCISE PERIOD"). 5. If the Company chooses to exercise the Option, it shall notify the Buyer of such fact in writing prior to the expiration of the Option Exercise Period and will reimburse Buyer promptly (but in no event more than three business days after such exercise) for the full amount of the Purchase Deposit, without interest. Buyer will assign, without recourse, to the Company all its rights in and under the Purchase Agreement, and under all other agreements and instruments which Buyer shall have executed in connection therewith. If the Company exercises the Option, the Company will use its best efforts to obtain the acknowledgement of the seller under the Purchase Agreement to release Buyer (and each of you individually) from any further liability or obligation under the Purchase Agreement or any other such agreements and instruments, although no assurance can be given that the seller will agree to any such release. 6. You understand and agree that the Company has no obligation to exercise the Option, and that it may be precluded from exercising the Option if the disinterested directors of the Company determine not to proceed with the development of the Club and the acquisition of the Club Assets, or if Sumitomo Bank's consent to the Company's purchase of the Club Assets is not obtained as may be required under the Company's loan agreement with it. If either of the foregoing should occur, or if the Landlord refuses to agree to extend the date by which the Lease Amendment must be executed by the Company to coincide with the Outside Closing Date under the Purchase Agreement, then you risk losing the full amount of the Purchase Deposit. 7. If, after completing its due diligence investigation, the Company determines that it would not be in its best interest to purchase the Club Assets on the terms and conditions set forth in the Purchase Agreement and therefore elects not to exercise the Option prior to the expiration of the Option Exercise Period, then the Company shall have no obligation or liability with respect to the Purchase Agreement or Lease Amendment, or any of the transactions 4 Mr. Rex A. Licklider Mr. D. Michael Talla March 31, 1998 Page 3 contemplated by either such agreement (as to which you jointly and severally indemnify and hold the Company free and harmless from and against any and all losses, liabilities and damages which the Company may incur or be subject to, arising out of its decision not to proceed with its acquisition of the Club Assets pursuant to the Purchase Agreement). If this should occur, then the Company acknowledges that Buyer shall have the right to consummate the transactions contemplated by the Purchase Agreement and Lease Amendment and to explore the development or sale of the Club and Club Assets on such terms and conditions, and with such development partners, as shall be acceptable to it; provided that, the disinterested directors of the Company's Board of Directors shall have approved of Buyer's right to develop and/or sell the Club and Club Assets (whether on its own or with one or more development partners) after full disclosure of all relevant terms related to such proposed development or sale. If the foregoing reflects our agreement and understanding, please date and execute this letter and the enclosed copy in the appropriate spaces, whereupon it shall be binding on you and the Company, and our respective successors, permitted assigns and legal representatives. Very truly yours, THE SPORTS CLUB COMPANY, INC. By: /s/ John Gibbons --------------------------------- Authorized Officer Agreed and accepted as of the date of this letter in Los Angeles, California. /s/ Rex A. Licklider --------------------------------- Rex A. Licklider /s/ D. Michael Talla --------------------------------- D. Michael Talla EX-10.71 10 EXHIBIT 10.71 1 EXHIBIT 10.71 HILTON PURCHASE APRIL 1, 1998 2 ================================================================================ ASSET PURCHASE AGREEMENT between HILTON HOTELS CORPORATION, a Delaware corporation and RM SPORTS CLUB, INC., a California corporation Dated as of April 1, 1998 ================================================================================ 3 TABLE OF CONTENTS
PAGE SECTION 1. PURCHASE AND SALE OF ASSETS................................................. 1 1.1 Assets to be Transferred.................................................... 1 1.2 Excluded Assets............................................................. 2 1.3 Liabilities to be Assumed................................................... 3 1.4 Liabilities Not to be Assumed............................................... 3 1.5 Purchase Price.............................................................. 4 1.6 Deliveries into Escrow...................................................... 6 1.7 Seller's Conditions to Closing.............................................. 7 1.8 Purchaser's Conditions to Closing........................................... 7 1.9 Closing..................................................................... 9 1.10 Costs....................................................................... 10 1.11 Purchase Price Allocation................................................... 11 1.12 Sales Taxes................................................................. 11 1.13 Accounting Treatment........................................................ 11 1.14 Tax Consequences............................................................ 11 1.15 Prorations.................................................................. 11 1.16 Delivery of Documents....................................................... 14 SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER.................................... 14 2.1 Due Organization; Etc....................................................... 14 2.2 Manager's Estoppel Certificate.............................................. 14 2.3 Absence of Changes.......................................................... 14 2.4 Title to Assets............................................................. 15 2.5 Equipment, Etc.............................................................. 15 2.6 Foreign Person.............................................................. 15 2.7 Authority; Binding Nature of Agreements..................................... 15 2.8 Non-Contravention; Consents................................................. 16 2.9 Information................................................................. 16 SECTION 3. "AS IS"; DUE DILIGENCE COMPLETED; DISCLAIMER OF ADDITIONAL WARRANTIES OF SELLER ....................................................... 16 SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER................................. 17 4.1 Due Organization............................................................ 17 4.2 Authority; Binding Nature of Agreement...................................... 17 4.3 Non-Contravention; Consents................................................. 17 SECTION 5. INDEMNIFICATION, ETC........................................................ 18 5.1 Survival of Representations and Warranties.................................. 18 5.2 Indemnification by Seller................................................... 18 5.3 Indemnification by Purchaser................................................ 18
1 4 5.4 Nonexclusivity of Indemnification Remedies.................................. 19 5.5 Defense of Third Party Claims by Seller..................................... 19 5.6 Defense of Third Party Claims by Purchaser.................................. 20 5.7 Exercise of Remedies by Indemnitees......................................... 20 SECTION 6. ADDITIONAL COVENANTS AND AGREEMENTS......................................... 21 6.1 Interim Conduct of the Business............................................. 21 6.2 Standstill by Seller........................................................ 21 6.3 Purchaser's Access.......................................................... 22 6.4 Preservation of Business and Relationships.................................. 22 6.5 No Inconsistent Action...................................................... 22 6.6 Damage or Destruction....................................................... 22 6.7 Condemnation................................................................ 23 6.8 Liquor License.............................................................. 23 6.9 [Intentionally omitted] .................................................... 23 6.10 FIRPTA Affidavit............................................................ 23 6.11 SEC Required Financial Information.......................................... 23 6.12 Investment in the Club...................................................... 23 SECTION 7. MISCELLANEOUS PROVISIONS.................................................... 24 7.1 Further Assurances.......................................................... 24 7.2 Attorneys' Fees............................................................. 24 7.3 Notices..................................................................... 24 7.4 Publicity; Confidentiality.................................................. 26 7.5 Noncompetition/Nonsolicitation.............................................. 26 7.6 Time of the Essence......................................................... 27 7.7 Headings.................................................................... 27 7.8 Counterparts................................................................ 27 7.9 Governing Law; Venue........................................................ 28 7.10 Successors and Assigns...................................................... 28 7.11 Remedies Cumulative; Specific Performance................................... 28 7.12 No Consequential Damages.................................................... 28 7.13 Waiver...................................................................... 28 7.14 Amendments.................................................................. 29 7.15 Severability................................................................ 29 7.16 Parties in Interest......................................................... 29 7.17 Entire Agreement............................................................ 29 7.18 Brokers..................................................................... 29 7.19 Construction................................................................ 29 7.20 Waiver of Jury.............................................................. 30 7.21 Authority to Sign........................................................... 30 7.22 Survival Post-Closing....................................................... 30 7.23 Facsimile Signatures........................................................ 30
2 5 EXHIBITS Exhibit A: Certain Definitions Exhibit B: Form of Assignment of Contracts Exhibit C: Form of Assignment of Leases Exhibit D: Form of Bill of Sale Exhibit E: Form of Note Exhibit F: [Intentionally omitted] Exhibit G: [Intentionally omitted] Exhibit H: Form of Assignment and Assumption SCHEDULES Schedule 1.1(e) Assumed Contracts Schedule 1.4(a) Contracts and Leases Not to be Assumed Schedule 1.8(a)(ii) Additional Seller Delivery Items Schedule 1.16 Delivery of Due Diligence Documents Schedule 2.5 Equipment Inventory Disclosure Schedule 3 6 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is entered into as of April 1, 1998 by and between HILTON HOTELS CORPORATION, a Delaware corporation ("Seller"), and RM SPORTS CLUB, INC., a California corporation ("Purchaser"). Certain capitalized terms used in this Agreement are defined on Exhibit A. RECITALS A. Seller desires to sell to Purchaser, and Purchaser desires to purchase from the Seller, (the "Acquisition") substantially all of the assets used or held for use by Seller in the operation of The Vertical Club located at 61st Street, New York, New York (the "Club"). AGREEMENT NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, Purchaser, and Seller, intending to be legally bound, agree as follows SECTION 1. PURCHASE AND SALE OF ASSETS. 1.1 ASSETS TO BE TRANSFERRED. Subject to the terms and conditions of this Agreement, on the Closing Date (as hereinafter defined) Seller shall sell, transfer, convey, assign, and deliver to Purchaser and Purchaser shall purchase and accept all of the business, rights, claims and assets (of every kind, nature, character and description, whether real, personal or mixed, whether tangible or intangible, whether accrued, contingent or otherwise), of the Seller located at the Club, other than the Excluded Assets (as hereinafter defined) relating to the Club (collectively, the "Purchased Assets"). The Purchased Assets shall include, but not be limited to, the following: (a) REAL PROPERTY. All real property, appurtenances thereto, rights in connection therewith and interests therein owned by the Seller relating to the Club and described on Part 7 of the Disclosure Schedule (the "Real Property"). Real Property includes, without limitation, any Real Property Leases and any interests of Seller therein and thereto. (b) LEASED REAL PROPERTY. All real property leases of the Seller described on Part 7 of the Disclosure Schedule (the "Real Property Leases"), if any. (c) PERSONAL PROPERTY LEASES. All leases of machinery, equipment, vehicles, furniture and other personal property leased by Seller and described on Part 6 of the Disclosure Schedule (the "Personal Property Leases"). (d) MACHINERY AND EQUIPMENT. All machinery, equipment, vehicles, tools, supplies, spare parts, furniture and all other personal property not included in inventory 7 (other than personal property leased pursuant to Personal Property Leases) owned, utilized or held for use by Seller and located at the Club. (e) CONTRACTS. Other than the Membership Agreements, all Contracts, contractual rights, purchase orders and sales orders (the "Assumed Contracts") of Seller that are listed on Schedule 1.1(e) and expressly assumed by Purchaser; provided, however, that even if one or more Personal Property Leases are listed on Schedule 1.1(e), Purchaser shall not be obligated to assume any Personal Property Leases if and to the extent the aggregate monthly payments under all Personal Property Leases to be so assumed would exceed $1,500. Seller shall pay off any Personal Property Leases that otherwise would be assumed pursuant to this Section 1.1(e) if and to the extent necessary to cause such aggregate monthly payments not to exceed such amount. Any Contract not specifically listed on Schedule 1.1(e), other than the Membership Agreements, shall conclusively be deemed to be a Contract expressly not being assumed by Purchaser even if such contract is not specifically listed on Schedule 1.4(a). (f) MEMBERSHIP AGREEMENTS. All of the Membership Agreements, including rights to renewals, monthly membership fees subject to Section 1.15, receivables and other rights and obligations related thereto. (g) RECORDS AND FILES. All membership lists (in both written and machine readable format), records, files, invoices, customer lists, blueprints, specifications, designs, drawings, accounting records, business records, operating data and other data of Seller relating to the Club (including, without limitation, all billing/accounting hardware and software relating to the Club that are owned by, leased by or licensed to Seller if and to the extent assignable). (h) TELEPHONE NUMBERS. All local telephone numbers associated with the Club that are within Seller's control to assign at Closing (i) LICENSES; PERMITS. Except as may be expressly set forth in Parts 10 and 11 of the Disclosure Schedule, all licenses, permits and approvals held by Seller, including without limitation, all Governmental Authorizations. (j) INVENTORY. All inventories of raw materials, work-in-process and finished goods (including all such in transit) of the Seller, together with related packaging materials (collectively the "Inventory"). (k) MANAGEMENT AGREEMENT. The Management Agreement, together with all right, title and interest of Seller in any and all claims, demands and causes of action that Seller may have against Manager arising out of or in connection with the Management Agreement. 8 1.2 EXCLUDED ASSETS. The provisions of Section 1.1 notwithstanding, Seller shall not sell, transfer, assign, convey or deliver to Purchaser, and Purchaser will not purchase or accept the following assets of Seller (collectively the "Excluded Assets"): (a) CONSIDERATION. The consideration delivered by Purchaser to Seller pursuant to this Agreement. (b) TAX CREDITS. Federal, state and local income and franchise tax credits and tax refund claims. (c) FRANCHISE. Seller's franchise to be a corporation, its articles of incorporation, stock book, minute book, corporate seal, and its books and records having exclusively to do with its organization and capitalization. (d) TAX RECORDS. Seller's income and franchise tax returns and tax records. (e) MARK. The right to use the "Vertical Club" service mark. 1.3 LIABILITIES TO BE ASSUMED. Subject to the terms and conditions of this Agreement, on the Closing Date, Purchaser shall assume and agree to perform and discharge to the extent indicated below the following, and only the following, specific debts, liabilities and obligations of the Seller (collectively the "Assumed Liabilities"): (a) MEMBERSHIP AGREEMENTS. Subject to Section 1.15, Seller's obligation to honor and service the Membership Agreements, other than any refunds arising under any Governmental Authorization, Legal Requirement or Order solely as a result of the Closing, the payment of which shall be the sole responsibility of Seller and shall be paid by Seller directly. (b) SPECIFIED CONTRACTUAL LIABILITIES. The Specified Contractual Liabilities. (c) LIABILITIES UNDER LEASES, PERMITS AND LICENSES. Seller's obligations arising from and after the Closing Date under the Real Property Leases, any Personal Property Leases not described in Schedule 1.4(a) and any of the permits or licenses assigned to Purchaser at the Closing. 1.4 LIABILITIES NOT TO BE ASSUMED. Except as and to the extent specifically set forth in Section 1.3, Purchaser is not assuming any debts, liabilities, obligations or contracts of the Seller and all such debts, liabilities, obligations and contracts shall be and remain the responsibility of the Seller. Notwithstanding the provisions of Section 1.3 and without limiting the generality of the foregoing, Purchaser is not assuming and the Seller shall not be deemed to have transferred to Purchaser the following debts, liabilities, obligations and contracts of Seller: 9 (a) CERTAIN CONTRACTS. The obligations of the Seller under and pursuant to the Contracts set forth on Schedule 1.4(a) and any other Contracts not specifically listed on Schedule 1.1(e). (b) TAXES ARISING FROM TRANSACTION. Any United States, foreign, state or other taxes applicable to, imposed upon or arising out of the sale or transfer of the Purchased Assets to Purchaser and the other transactions contemplated by this Agreement, including but not limited to any transfer, sales, use, gross receipts or documentary stamp taxes. (c) INCOME AND FRANCHISE TAXES. Any liability or obligation of the Seller for Federal income taxes and any state or local income, profit or franchise taxes (and any penalties or interest due on account thereof). (d) INSURED CLAIMS. Any liability of the Seller insured against, to the extent such liability is or will be paid by an insurer. (e) LITIGATION MATTERS. Any liability or obligation with respect to any suits, actions, claims or Proceedings arising out of or in any way related to the operation of the Club prior to Closing, whether or not described on Part 15 of the Disclosure Schedule. (f) TRANSACTION EXPENSES. All liabilities, costs, obligations or expenses incurred by, or on behalf of the Seller in connection with this Agreement and the transactions contemplated herein. (g) LIABILITY FOR BREACH. Liabilities and obligations of the Seller for any breach or failure to perform any of the Seller's covenants and agreements contained in, or made pursuant to, this Agreement, or, prior to the Closing, any other Contract, whether or not assumed hereunder, including any breach arising from assignment of such contracts hereunder without consent of third parties, unless Purchaser accepts such assignment with Knowledge that such consent was not obtained. (h) LIABILITIES TO AFFILIATES. Liabilities and obligations of the Seller to its Affiliates. (i) VIOLATION OF LAW. Any liability or obligation with respect to any violation of or failure to comply with any Legal Requirement or Order arising out of or in any way related to the Club or its operations on or before Closing. (j) INFRINGEMENTS. Any liability to a third party under the Seller's Proprietary Assets, if any. 10 (k) SERVICE MARK LICENSE AGREEMENT. The Service Mark License Agreement. 1.5 PURCHASE PRICE. (a) As consideration for the sale of Purchased Assets, at Closing Purchaser shall (i) pay to the Seller a total of $4,000,000 (the "Purchase Price"), as adjusted by Section 1.15, and (ii) assume the Assumed Liabilities by executing and delivering to Seller an Assignment of Contracts (the "Contract Assignment") in substantially the form of Exhibit B, an Assignment of Leases (the "Lease Assignment") in substantially the form of Exhibit C and a Bill of Sale (the "Bill of Sale") in substantially the form of Exhibit D. The Purchase Price shall be payable by Purchaser as follows: (b) On or before the close of business on Thursday, April 2, 1998, Purchaser shall have deposited into an interest bearing escrow (the "Escrow") established with Chicago Title Company ("Deposit Holder") the sum of $1,000,000, in immediately available funds (such amount, together with the interest earned thereon, being hereinafter referred to as the "Deposit"). The Deposit shall be credited against the Purchase Price. (c) At Closing, (i) Purchaser's promissory note in the amount of $2,666,666 in the form attached hereto as Exhibit E (the "Note") and (ii) such sum as may be necessary to make Purchaser's total cash deposit with Deposit Holder equal the Purchase Price, after giving effect to any and all of Purchaser's and Seller's credits and debits pursuant hereto, including, without limitation, the Deposit and the face amount of the Note. (d) [Intentionally omitted] (e) [Intentionally omitted] (f) Purchaser and Seller agree that all sums deposited by Purchaser pursuant hereto shall be invested in treasury bills, certificates of deposit, short term money market instruments or bank repurchase contracts approved by Purchaser and Seller, in such manner as to make all such sums (and the interest earned thereon) available on the date for Closing. Purchaser and Seller hereby instruct Deposit Holder to so invest such sums and to return to Purchaser, upon Closing, all sums in excess of those needed to satisfy Purchaser's obligations hereunder to Seller. Interest earned thereon shall be for the account of Purchaser, and Purchaser shall provide Deposit Holder with Purchaser's taxpayer identification number for use in opening the Escrow. (g) Any funds to be delivered hereunder shall be immediately available federal funds wire transferred. It shall be Purchaser's responsibility to obtain adequate wiring instructions for an escrow account of Deposit Holder. 11 (h) If the Closing shall fail to occur solely because of the breach of Purchaser under this Agreement, then Deposit Holder shall deliver the Deposit to Seller, and Seller shall be entitled to retain the Deposit, as liquidated damages and not as a penalty and as Seller's sole remedy; it being agreed, for purposes of this Section 1.5(h) only, that it shall be a breach of Purchaser under this Agreement if, without limitation, Purchaser shall not have entered into the Assignment and Assumption with The Sports Club Company, Inc. However, if Closing shall thereafter fail to occur for any other reason or reasons, then Deposit Holder shall return the Deposit promptly to Purchaser upon Purchaser's request therefor at any time after the scheduled date for Closing, or on such sooner date as this transaction is cancelled by Purchaser and Seller. THE PARTIES AGREE THAT THEY HAVE NEGOTIATED WITH REGARD TO THE DETERMINATION OF DAMAGES AND HAVE CONCLUDED THAT, IF CLOSING FAILS TO OCCUR SOLELY BECAUSE OF THE BREACH OF PURCHASER UNDER THIS AGREEMENT, WHEN ALL CONTINGENCIES TO CLOSING HAVE OTHERWISE BEEN SATISFIED OR WAIVED, THEN IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO DETERMINE THE SELLER'S DAMAGES, THAT THE AMOUNT OF THE DEPOSIT IS A REASONABLE ESTIMATE OF THE DAMAGES IN SUCH EVENT, AND THAT THE SELLER, AS ITS SOLE REMEDY AND NOT AS A PENALTY, SHALL BE ENTITLED TO RETAIN THE DEPOSIT AS LIQUIDATED DAMAGES. UPON PAYMENT OF SAID SUM TO SELLER, PURCHASER SHALL BE RELEASED FROM ANY FURTHER LIABILITY TO SELLER, AND ANY ESCROW CANCELLATION FEES AND TITLE COMPANY CHARGES SHALL BE PAID BY PURCHASER. THE PARTIES HEREBY ACKNOWLEDGE THAT THEY ARE IN EQUAL BARGAINING POSITIONS, ARE SOPHISTICATED IN BUSINESS MATTERS AND WERE REPRESENTED BY COUNSEL AT ALL TIMES DURING THE NEGOTIATION OF THIS LIQUIDATED DAMAGES PROVISION. /s/ David M. Talla /s/ Matt J. Hart ------------------------------ --------------------------- Purchaser Seller 1.6 DELIVERIES INTO ESCROW. (a) On or before the Closing Date, Seller, shall deposit the following items (collectively, the "Seller Delivery Items") into the Escrow: (i) An estoppel certificate from each of the Subtenants whose Subleases are to be an Assumed Contract in the form last delivered by Seller to Purchaser prior to the execution of this Agreement. (ii) Manager's Estoppel Certificate in the form last delivered by Seller to Purchaser prior to the execution of this Agreement. (b) On or before the Closing Date, Purchaser shall deposit the following items (collectively, the "Purchaser Delivery Items") into Escrow: (i) The Purchase Price, subject to and in accordance with the terms and conditions of Section 1.5. 12 (ii) One executed original of the Note. (c) On or before the Closing Date, Seller and Purchaser shall deposit the following items (collectively, the "Joint Delivery Items") into the Escrow: (i) Four fully executed originals of the Contract Assignment. (ii) Four fully executed and notarized originals of the Lease Assignment. (iii) Four fully executed originals of the Bill of Sale. The Seller Delivery Items, the Purchaser Delivery Items and the Joint Delivery Items are referred to, collectively, as the "Delivery Items". 1.7 SELLER'S CONDITIONS TO CLOSING. (a) Seller's obligations to consummate the Transactions are conditioned upon the following, each of which shall be a condition precedent: (i) All Purchaser Delivery Items and all Joint Delivery Items executed by Purchaser shall have been deposited into the Escrow. (ii) All of the representations and warranties of Purchaser contained herein shall be true and correct in all material respects on and as of the Closing Date as though remade and republished on and as of said date. (iii) Purchaser shall have performed and complied with all of its obligations and covenants hereunder in all material respects. (iv) The execution and delivery of this Agreement by Purchaser, and the performance of Purchaser's covenants and obligations under it, shall have been duly authorized by all necessary corporate action, and Seller shall have received copies of all resolutions pertaining to that authorization, certified by the secretary of Purchaser. (v) Seller shall be relieved of any and all future liability under the Master Lease upon the expiration of its primary term; provided, however, that Seller may instead, in its sole discretion, accept a lease guaranty of the Master Lease from an entity having a net worth at Closing, exclusive of goodwill, in excess of $250 million in lieu of Seller being so relieved. 13 (vi) The form and substance of all certificates, instruments, opinions, and other documents delivered to Seller under this Agreement shall be satisfactory in all reasonable respects to Seller and its counsel. (vii) Purchaser and The Sports Club Company shall have entered into the Assignment and Assumption. (b) There is no Proceeding pending or threatened pertaining to the Transactions or their consummation that shall have been instituted or threatened by any Governmental Body or Person. 1.8 PURCHASER'S CONDITIONS TO CLOSING. (a) Purchaser's obligations to consummate the Transactions are conditioned upon the following, each of which shall be a condition precedent, except for Section 1.8(a)(vii), which shall be a condition concurrent: (i) All Seller Delivery Items and all Joint Delivery Items executed by Seller shall have been deposited into the Escrow. (ii) All items listed on Schedule 1.8(a)(ii) shall have been delivered to Purchaser on or before Closing, except (A) if and to the extent otherwise expressly provided in Schedule 1.8(a)(ii) and (B) the keys and security code for the Club shall be present at the Club at Closing. (iii) All of the representations and warranties of Seller contained herein shall be true and correct in all material respects on and as of the Closing Date as though republished and remade on and as of that date; it being expressly understood and agreed, however, that changes in representations and warranties which do not have a material adverse effect upon the business of the Club shall in no event be a basis giving rise to a right of Purchaser to terminate this Agreement pursuant to Section 1.8(c). (iv) Seller shall have performed and complied with all of its obligations and covenants hereunder in all material respects. (v) The "Due Diligence Period" shall conclusively be deemed to have expired upon the execution of this Agreement by Purchaser and Seller. (vi) There is no Proceeding pending or threatened pertaining to the Transactions or their consummation that shall have been instituted or threatened by any Governmental Body or Person. (vii) No Legal Requirement or Order shall have been enacted, entered, issued, promulgated or enforced by any Governmental Body, nor shall any 14 Proceeding have been instituted or, to the best knowledge of Seller, threatened and remain so by any Governmental Body, at what would otherwise be the Closing Date which would impair Purchaser's ability, following the Closing Date, to continue to operate the Club as presently operated, except for any Legal Requirement affecting the operation of an adult entertainment venue within a residential neighborhood. (b) Seller shall have the right to modify, update and supplement all representations, warranties, exhibits and schedules attached to or delivered in connection with this Agreement through the Closing Date (any such modification, update or supplement, a "Modification"). Notwithstanding the foregoing, if Seller makes any Modification and if such Modification would be likely to have a material adverse effect upon the Club and/or its operations, then Purchaser shall have the right to terminate this Agreement by giving a notice to Seller terminating this Agreement within 5 days of Purchaser's receipt of the Modification, and whether or not the Due Diligence Period has expired. If such 5-day period would expire after the Outside Closing Date (as defined below), then the Outside Closing Date shall be extended accordingly. In the event of any such termination, the Deposit shall be returned promptly to Purchaser, and the parties will have no further obligations to each other hereunder. Purchaser's failure to give any such termination notice to Seller within such 5-day period shall conclusively be deemed to be Purchaser's approval of any such Modification. From the date hereof until Closing, if Barbara Boultinghouse or Kevin Luebbers, on behalf of Seller, learns of any fact or circumstance which causes, or has a reasonable likelihood of causing, a representation or warranty of Seller's hereunder to be untrue or misleading, or learns of any other fact or circumstance which materially affects the Purchased Assets, Seller shall notify Purchaser within five days after Barbara Boultinghouse or Kevin Luebbers learns thereof (but in no event later than Closing). (c) If (i) Seller shall not have been able to obtain any required government or third party consent or approval, (ii) any material representation or warranty of Seller shall prove to have been inaccurate or untrue in any material respect when first made or (iii) Seller shall not have performed, in any material respect, any of its material covenants contained in this Agreement, and in each case by Closing, then Purchaser shall be entitled, without limitation, (A) not to consummate, pursuant to Section 1.9(a), the Transactions and have the Deposit Holder or Seller, as applicable, return to Purchaser the Deposit (but without any interest thereon for such period of time, if any, as it may have been held by Seller) less any termination fees and expenses of Deposit Holder, or (B) to consummate the Transactions if Purchaser, in its sole discretion, is willing to consummate the Transactions on such basis. 1.9 CLOSING. (a) Closing shall occur, if at all, on or before Wednesday, April 15, 1998 (the "Outside Closing Date"). If all conditions precedent set forth in Sections 1.7 and 1.8 have not been satisfied or waived and the Closing shall not have occurred on or before the Outside Closing Date, then either Purchaser or Seller may unilaterally cancel this Agreement, at any time thereafter prior to such satisfaction or waiver, by notice to the 15 other, except that if the unsatisfied condition(s) is for the benefit of the party not giving said notice, then such party shall have the right, within ten days after its being served with said notice, to waive such unsatisfied condition(s) and proceed to effect Closing immediately. Eleven days after the effective date of said notice, if Closing has not been agreed to by the party not giving said notice, as provided above, then, subject to Section 1.5(h), all funds deposited by Purchaser, and all interest earned thereon, shall be returned immediately to Purchaser. (b) Consummation of the Transactions (the "Closing") will take place at the offices of Resch Polster Alpert & Berger LLP, 10390 Santa Monica Boulevard, Fourth Floor, Los Angeles, California 90025-5058 on the Closing Date. (c) If Closing has not occurred in accordance with the terms and conditions of this Agreement, then this Agreement shall automatically terminate without any further action required, and the parties shall have no further liability hereunder. (d) When all conditions precedent to Closing set forth in Sections 1.7 and 1.8 shall have been satisfied, or Deposit Holder shall have received written instruction from the party or parties, or their respective counsel, for whose benefit any such unsatisfied condition precedent exists waiving the satisfaction of such conditions precedent, and when each of the parties hereto shall have otherwise instructed Deposit Holder to proceed with the Closing, then Deposit Holder shall take the following actions in the following order: (i) Insert the "Endorsed Date" (as defined therein) on the last page of the Note. (ii) Disburse the Purchase Price (including the originally executed Note) to Seller in accordance with Seller's instructions. (iii) Deliver two fully executed original copies of each of the Contract Assignment, Lease Assignment and Bill of Sale to Seller. (iv) Deliver two fully executed original copies of each of the Contract Assignment and Bill of Sale, one fully executed original of the Lease Assignment and one nonoriginal copy of the Note to Purchaser. (v) Record the Lease Assignment and deliver conformed copies of the duly recorded Lease Assignment to each of Seller and Purchaser. (vi) Deliver the estoppel certificates referenced in Sections 1.6(a)(i) and (ii) to Purchaser. 1.10 COSTS. 16 (a) Seller shall pay the following: (i) One-half of all fees and costs of Deposit Holder. (ii) All recording fees and charges, intangible taxes and similar costs, relating to the transfer of the Purchased Assets pursuant hereto. (iii) All documentary transfer taxes and fees, real property transfer or gains taxes, governmental transfer fees and all sales, use, and similar taxes, if any, payable in connection with the Transactions. (iv) Cost of obtaining all reports Seller is required hereunder or by law to deliver to Purchaser. (v) Subject to the provisions of Section 5 (including the indemnification and other obligations of Purchaser thereunder), Seller's own Transaction Costs and all Transaction Costs that have been incurred or that are in the future incurred by, on behalf of or for the benefit of, the Seller (the "Seller Transaction Costs). (b) Purchaser shall pay the following: (i) Costs of obtaining the Title Policy. (ii) Costs of obtaining any Survey. (iii) One-half of all fees and costs of Deposit Holder. (iv) Subject to the provisions of Section 5 (including the indemnification and other obligations of Seller thereunder), Purchaser's own Transaction Costs and all Transaction Costs (including all legal fees and expenses payable to Resch Polster Alpert & Berger LLP) that have been incurred or that are in the future incurred by, or on behalf of or for the benefit of, Purchaser (the "Purchaser Transaction Costs"). 1.11 PURCHASE PRICE ALLOCATION. The Purchase Price shall be allocated among the Purchased Assets as follows (the "Allocation Statement"): (i) $250,000 to the equipment being purchased; (ii) $3,750,000 to the Membership Agreements being purchased; and (iii) nothing to any of the other Purchased Assets. The parties agree to report (on Form 8594 and otherwise) the allocation of the Purchase Price in a manner consistent with the Allocation Statement. The allocation prescribed by the Allocation Statement shall be conclusive and binding upon each party for all purposes. No party shall file any tax return or other document with, or make any statement or declaration to, any governmental body if such document, statement or declaration is inconsistent with the allocation prescribed by the Allocation Statement. 17 1.12 SALES TAXES. The Seller shall bear and pay any sales taxes, use taxes, transfer taxes, documentary charges, recording fees, or similar taxes, charges, fees or expenses that are or may become payable in connection with the sale of the Purchased Assets to Purchaser or in connection with any of the Transactions. 1.13 ACCOUNTING TREATMENT. The parties intend that the Acquisition will be treated as a purchase for accounting purposes. 1.14 TAX CONSEQUENCES. For federal income tax purposes, the Acquisition is intended to constitute a taxable transaction. 1.15 PRORATIONS. (a) Except as otherwise hereinafter provided, at and as of Closing, Purchaser and Seller shall prorate in cash (i) real property taxes and assessments for the Purchased Assets on the basis of the current fiscal year if and to the extent that Seller shall be liable for real property taxes and assessments under the Real Property Leases, (ii) rents under the Real Property Leases, (iii) rents under any Personal Property Leases described in Schedule 1.1(e), (iv) utility and sewer charges, (v) management fees under the Management Agreement, (vi) payments under the Assumed Contracts, (vii) operating expenses, and (viii) other items customarily prorated in transactions of this sort. Seller shall give Purchaser a credit at Closing in the amount of any deposits under any Subleases that are to be Assumed Contracts. (b) No pro ration shall be made for insurance premiums on insurance policies of Seller (none of which Purchaser elects to accept and none of which Seller elects to assign), for employee salaries, vacations, benefits, bonuses, payroll taxes or other employee costs. Seller shall terminate, or cause to be terminated, as of Closing all employees and independent contractors working at the Club and shall pay, or cause to be paid, all employee salaries, vacations, benefits, bonuses, payroll taxes and other employee and independent contractor costs as of and including the Closing Date. Seller represents and warrants to Purchaser that it has fewer than 50 employees working at the Club who are full time employees, as full time employees are defined under the WARN Act. Subject to the willingness of such employees and independent contractors to be interviewed and, if asked by Purchaser, to be rehired, Purchaser shall be permitted to interview and, at its election, rehire, from and after Closing, any or all of such terminated employees and independent contractors and shall provide all such rehired employees (but not any rehired independent contractors) with health care insurance and benefits and worker's compensation insurance generally consistent with that generally provided by Purchaser to its employees. (c) At and as of the Closing Date, Purchaser and the Seller shall proportionately allocate all prepaid items of income ("Prepaid Income"), including without limitation monthly dues, Prepaid Dues, and gift certificates; provided that there shall be no 18 such proportionate allocation of up to 36,000 months of Prepaid Dues. "Prepaid Dues" shall mean total cash consideration, whether designated as membership fees or otherwise, paid in advance for months of membership sold at the Club; provided, however, that if a Member is not obligated, from and after Closing, to pay monthly dues, then all such periods of time from and after Closing for which such Member is not obligated to pay monthly dues shall be considered when calculating whether there may be more than 36,000 months of Prepaid Dues. Dues payable on a monthly basis shall not constitute Prepaid Dues. There shall be no proportionate allocation of initiation fees, if any, paid and collected in the Ordinary Course of Business. A blended average monthly rate for the total consideration paid in advance (whether paid in cash or "financed") for months of membership in connection with all Prepaid Dues shall be used for purposes of calculating the dollar value of any Prepaid Dues in excess of 36,000 months. Payments collected by Purchaser or Seller, as applicable, from Members within 30 days following the Closing Date shall be applied (A) first to any prorated amounts due Seller for the month in which the Closing shall have occurred, (B) next to any prorated amounts due Purchaser for the month in which the Closing shall have occurred, (C) next to any amounts due Purchaser for the month following the month in which the Closing shall have occurred and (D) then to any accounts receivable due Seller as of the Closing Date for any periods prior to the month in which the Closing shall have occurred; provided, however, that any payment, other than monthly dues, made by a Member after Closing shall belong to Purchaser if such Member is not obligated to pay monthly dues after the making of such payment. Payments from Members received by Purchaser or Seller, as applicable, more than 30 days following the Closing Date shall be applied first to the current period and then to past periods in reverse chronological order, i.e. to more recent periods before less recent periods; provided, however, that any payment, other than monthly dues, made by a Member after Closing shall belong to Purchaser if such Member is not obligated to pay monthly dues after the making of such payment. Any payments from Members collected by the Seller from and after the Closing shall be held in trust for the account of Purchaser and shall be promptly remitted to Purchaser minus any amounts owed to the Seller as set forth in this Section 1.15(c) together with an accounting of such payments in reasonable detail. Any payments from Members collected by Purchaser from and after the Closing that are owed to the Seller as set forth in this Section 1.15(c) shall be held in trust for the account of the Seller and shall be promptly remitted to the Seller together with an accounting of such payments in reasonable detail. (d) For a period of ninety (90) days following the Closing, Purchaser agrees that Purchaser shall, in accordance with Purchaser's standard practice in conducting and operating clubs such as the Club, attempt to collect any monthly dues under those Member Agreements assigned to and assumed by Purchaser which are attributable to the period prior to the Closing; provided, however, Purchaser shall have no obligation to commence any actions or proceedings or take any further action to collect any such compensation, fees, revenues or income due to Seller hereunder. After the Closing, Seller shall not take any action against any party to any Membership Agreement assigned to and assumed by Purchaser by reason of any unpaid monthly dues owed Seller thereunder. 19 (e) If real estate taxes and/or assessments, utility charges or any other item is prorated as of Closing on any basis other than actual amounts charged for the current period, such item or items shall be re-prorated upon determination of such actual amounts, and the party owing funds to the other shall promptly remit such funds to the other; provided, however, that in no event shall Seller be liable for payment of any increase in real estate taxes if and to the extent occasioned by any reassessment of the Real Property as a result of the Acquisition. If either party owing funds hereunder to the other does not remit them within 30 days after demand therefor, such funds shall thereafter bear interest at the lesser of 10% per annum and the maximum lawful rate. In all events, the amount of any refund or credit shall be the amount the refund or credit would have been without giving effect to the Transactions. The parties shall further cooperate so as to calculate such net final proration amount within 180 days of the Closing. Any disagreement with respect to such final calculation shall be resolved pursuant to binding arbitration before a "Big 4" accounting firm to be designated by Purchaser or any other accounting firm that shall be mutually agreed upon by the parties. Each party shall bear its own cost and expenses in connection with such arbitration and one-half of the fees and expenses of the arbitrator. Each party shall be entitled to provide the arbitrator with such information as each party shall deem appropriate with respect to the matters to be determined by such arbitrator. (f) Final proration of percentage rents and similar apportionable items which are dependent for their calculation upon the economic performance of any Entity over a specified interval of time shall be accomplished as follows: The parties shall await the expiration of the specified interval to determine the gross rents, gross receipts and other economic performance over the entire interval and then prorate the item by allocating to Seller the product of the rents or other similar apportionable item for the entire interval multiplied by a fraction, the numerator of which is the number of days within the specified interval which occur before Closing and the denominator of which is the number of days in the entire specified interval. (g) Operating expenses which are payable (or reimbursable) by any present Subtenant shall not be prorated hereunder (except to the extent that Seller is due a credit for having already paid such expense). Purchaser shall send customary statements for reimbursement of operating expenses and taxes to said tenants after consulting with Seller with respect to appropriate amounts due therefor, and shall remit to Seller, upon receipt, Seller's prorated share thereof, determined as provided in subsection (f) above. (h) If any Subtenant shall owe any sums under its respective Sublease at Closing, then Seller shall retain its right to pursue such Subtenant for such sums. Any sums received by Purchaser or Seller, as applicable, following the Closing Date from any Subtenant shall be applied first to the current period and then to past periods in reverse chronological order, i.e., to more recent periods before less recent periods. Any such sums collected by Seller from and after the Closing shall be held in trust for the account of Purchaser, and Seller shall promptly remit such sums to Purchaser. Any such 20 sums collected by Purchaser from and after the Closing that are owed to Seller as set forth in this section 1.15(h) shall be held in trust for the account of Seller, and Purchaser shall promptly remit such sums to Seller together with an accounting of such sums in reasonable detail. Except as set forth in the next sentence, Purchaser shall have no obligation to attempt to collect any sums due under any Sublease assigned to and assumed by Purchaser if and to the extent such sums are attributable to any period prior to the Closing. If Purchaser pursues any Subtenant for any past due sums under the applicable Sublease, then Purchaser shall do so only for all such sums that may be past due; provided, however, that, while Purchaser may settle any past due sums relating to any period after Closing, Purchaser shall not settle any past due sums relating to any period prior to Closing without Seller's prior written consent. (i) Prior to Closing, Purchaser and Seller shall prepare and agree upon a proforma closing statement as if Closing were occurring at 12:01 a.m. on February 1, 1998 (the "Proforma Closing Statement"). Notwithstanding anything to the contrary contained in this Agreement, the proration calculations otherwise required by this Agreement shall, initially, be performed, at Closing, based upon the Proforma Closing Statement. As soon as possible after Closing, however, and in any event in accordance, without limitation, with Section 1.15(e), Purchaser and Seller shall further cooperate so as to calculate a net final proration amount based upon actual operating results for the Club for the period through and including the Closing Date. 1.16 DELIVERY OF DOCUMENTS. As soon as reasonably possible following execution hereof, if Seller has not already done so, Seller shall deliver to Purchaser for Purchaser's approval as to form and content, originals or legible copies of the following , to the extent that they exist and are either in Seller's possession or may reasonably be obtained by Seller (and, if any of the following are discovered by and/or prepared by or on behalf of Seller after the date hereof but prior to Closing, each such item shall be delivered to Purchaser immediately): (i) All Contracts; and (ii) An inventory of all tangible personalty, prepared to the best of Manager's knowledge, relating to the Club; provided, however, that Purchaser, if it so elects, may prepare, at Purchaser's cost, such an inventory itself, either in place of or in addition to Manager's inventory. SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants, to and for the benefit of the Purchaser Indemnitees, as follows: 2.1 DUE ORGANIZATION; ETC. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Seller is in good 21 standing and qualified to do business under the laws of, and in, the States of California and New York. Seller has all necessary power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own and use its assets in the manner in which its assets are currently owned and used; and (iii) to perform its obligations under all Seller Contracts. 2.2 MANAGER'S ESTOPPEL CERTIFICATE. To Seller's Knowledge, the representations and warranties of Manager contained in Manager's Estoppel Certificate are true, accurate and complete in all material respects. 2.3 ABSENCE OF CHANGES. To Seller's Knowledge, there has not been any material adverse change in the Seller's business, condition, assets, liabilities, operations, financial performance or net income, and no event has occurred that is likely to have a material adverse effect upon any thereof. Seller shall immediately notify Purchaser of the material details of any such material adverse change or such event promptly upon either Barbara Boultinghouse or Kevin Luebbers having actual knowledge of the same. If any such material adverse change or such event shall occur within 5 days of the otherwise scheduled date for Closing, then the scheduled date for Closing shall be extended until 5 Business Days from the earlier of (a) Purchaser's actual knowledge of the material details of such material adverse change or such event or (b) Purchaser's receipt of notice from Seller to Purchaser of the material details of such material adverse change or such event. 2.4 TITLE TO ASSETS. (a) Subject to Section 1.1(e), at Closing, Seller will own, and have good and valid title to, all of the Purchased Assets, including, without limitation, the Membership Agreements, free and clear of any Encumbrances. (b) Subject to Section 1.1(e), all leases and licenses pertaining to any Purchased Assets will be satisfied prior to Closing, and all Purchased Assets shall be transferred to Purchaser free and clear of such leases and licenses and any other Encumbrances. 2.5 EQUIPMENT, ETC.. Schedule 2.5 identifies all equipment owned or held for use by the Seller in connection with the Club. All equipment owned or held for use by the Seller in connection with the Club will be transferred, subject to Section 1.2, free and clear of all Encumbrances as part of the Purchased Assets at Closing. Neither Manager nor any third party owns any of such equipment. 22 2.6 FOREIGN PERSON. Seller is not a "foreign person" within the meaning of Section 1445 of the U.S. Internal Revenue Code of 1986. 2.7 AUTHORITY; BINDING NATURE OF AGREEMENTS. Seller has the absolute and unrestricted right, power and authority to enter into and to perform its obligations under this Agreement and the other Transactional Agreements to which it is a party; and the execution, delivery and performance by the Seller of this Agreement and the other Transactional Agreements have been duly authorized by all necessary action on the part of the Seller. This Agreement constitutes the legal, valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance. 2.8 NON-CONTRAVENTION; CONSENTS. Neither the execution and delivery of any of the Transactional Agreements, nor the consummation or performance of any of the Transactions, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of (i) any of the provisions of the Seller's articles of incorporation or bylaws or (ii) any resolution adopted by the Seller's stockholders, board of directors or any committee of the board of directors; or (b) contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Seller, or any of the Purchased Assets is subject. (c) The Seller was not, is not or will not be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with the execution and delivery of any of the Transactional Agreements or the consummation or performance of any of the Transactions 2.9 INFORMATION. Seller has furnished and will continue to furnish promptly to Purchaser detailed information with respect to the Club, Purchased Assets, Assumed Liabilities, Assumed Contracts and earnings and business operations of Seller and the Club. To Seller's Knowledge, all information contained in the exhibits and schedules attached to this Agreement and in the documents furnished to Purchaser by Seller pursuant to this Agreement or otherwise, is and shall be at the Closing, true, correct and complete. To Seller's Knowledge, all underlying documents incorporated or referred to in such exhibits and schedules, or in documents otherwise furnished to Purchaser by or on behalf of Seller, are true, correct and complete copies thereof, as the same have been or shall be amended or modified. 23 SECTION 3. "AS IS"; DUE DILIGENCE COMPLETED; DISCLAIMER OF ADDITIONAL WARRANTIES OF SELLER. Purchaser acknowledges that Purchaser has had or will have the opportunity to review all documents and other information made available to Purchaser or its Representatives. In addition, Purchaser has had or will have the opportunity to review all reports, studies, inspections, audits, appraisals, and other similar items which Purchaser may perform or have performed in connection with the Transactions, and Purchaser will otherwise do what it deems necessary in order to evaluate the financial condition, status of title, zoning and land use and the economical and operational viability of the Club. Purchaser acknowledges further that, prior to Closing, it will complete, or have had the opportunity to complete, physical and financial examinations relating to the Club and will consummate the Transactions on the basis of all such examinations. Purchaser further acknowledges to and agrees with Seller that, except for the representations and warranties set forth in Section 2 hereof, and subject to the terms and conditions of this Agreement, the Club shall be sold, at Closing, "AS IS" without any warranties or representations either expressed or implied, of any nature or type whatsoever from or on behalf of Seller. SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants, to and for the benefit of the Seller Indemnitees, as follows: 4.1 DUE ORGANIZATION. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all necessary power and authority: (a) to conduct its business in the manner in which its business is currently being conducted; and (b) to own and use its assets in the manner in which its assets are currently owned and used. 4.2 AUTHORITY; BINDING NATURE OF AGREEMENT. (a) Purchaser has the absolute and unrestricted right, power and authority to enter into and perform its obligations under this Agreement and the other Transactional Agreements to which it is a party; (b) The execution, delivery and performance of this Agreement and the other Transactional Agreements by Purchaser has been, or at Closing will have been, duly authorized by all necessary action on the part of Purchaser and its board of directors; and 24 (c) Each of this Agreement and the other Transactional Agreements constitutes a legal, valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance. 4.3 NON-CONTRAVENTION; CONSENTS. Neither the execution and delivery of any of the Transactional Agreements, nor the consummation or performance of any of the Transactions, will directly or indirectly (with or without notice or lapse of time): (a) contravene, conflict with or result in a violation of (i) any of the provisions of Purchaser's certificate or articles of incorporation or bylaws, or (ii) any resolution adopted by Purchaser's stockholders, Purchaser's board of directors or any committee of Purchaser's board of directors; (b) contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge any of the Transactions or to exercise any remedy or obtain any relief under, any Legal Requirement or any Order to which the Purchaser, or any of the assets owned or used by the Purchaser, is subject; (c) contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of, or give any Person the right to declare a default under, any contract to which Purchaser is a party or by which it or any of its assets are bound. SECTION 5. INDEMNIFICATION, ETC. 5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) The representations and warranties made by the parties hereto in this Agreement shall survive the Closing and shall expire on the first anniversary of the Closing Date: provided, that if, at any time prior to the first anniversary of the Closing Date any Indemnitee (acting in good faith) delivers a written notice alleging the existence of a Breach of any of such representations and warranties and asserting a claim for recovery under Section 5 based on such alleged Breach, then the claim asserted in such notice shall survive the first anniversary of the Closing until such time as such claim is fully and finally resolved. (b) For purposes of this Agreement, each statement or other item of information set forth in the Disclosure Schedule shall be deemed to be a representation and warranty in this Agreement made by the party by whom such schedule was delivered. 25 5.2 INDEMNIFICATION BY SELLER. Seller shall hold harmless and indemnify each of the Purchaser Indemnitees from and against, and shall compensate and reimburse each of the Purchaser Indemnitees for, any Damages which are suffered or incurred by any of the Purchaser Indemnitees or to which any of the Purchaser Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and which arise from, or as a result of, or are connected with: (a) any Breach of any representation or warranty made by Seller in this Agreement or any of the Transactional Agreements; (b) any Breach of any covenant or obligation of Seller; (c) any Liability that arises from or relates to any Seller Transaction Costs; or (d) any Liability to which any of the Purchaser Indemnitees may become subject and that arises from or relates to (i) any of the Purchased Assets prior to Closing or (ii) Excluded Assets or (iii) any Liability of the Seller not specifically assumed by Purchaser pursuant to this Agreement or (iv) the operation of the Club through and including Closing; (e) any Proceeding commenced relating to any Breach, Liability or matter of the type referred to in clauses (a), (b), (c) or (d) of this Section 5.2. 5.3 INDEMNIFICATION BY PURCHASER. Purchaser shall hold harmless and indemnify each of the Seller Indemnitees from and against, and shall compensate and reimburse each of the Seller Indemnitees for, any Damages which are suffered or incurred by any of the Seller Indemnitees or to which any of the Seller Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and that arise from, or as a result of, or are connected with: (a) any Breach of any representation or warranty made by Purchaser in this Agreement or any of the Transactional Agreements; (b) any Breach of any covenant or obligation of Purchaser in this Agreement or any of the Transactional Agreements; (c) any Liability that arises from or relates to any Purchaser Transaction Costs; (d) any Liability to which any of the Seller Indemnitees may become subject and that arises from or relates to (i) any of the Purchased Assets subsequent to Closing or (ii) any Assumed Liability, (iii) the operation of the Club after Closing or (iv) any 26 act or omission by Purchaser with respect to the Management Agreement from and after Closing; (e) any Proceeding commenced relating to any Breach, Liability or matter of the type referred to in any of clauses (a), (b) (c) or (d) of this Section 5.3; and (f) any Liability that arises under the WARN Act as a result of Seller not having given any advance notice to its employees and independent contractors working at the Club regarding their termination at Closing pursuant to Section 1.15(b). 5.4 NONEXCLUSIVITY OF INDEMNIFICATION REMEDIES. The indemnification remedies and other remedies provided in this Section 5 shall not be deemed to be exclusive. Accordingly, the exercise by any Person of any of its rights under this Section 5 shall not be deemed to be an election of remedies and shall not be deemed to prejudice, or to constitute or operate as a waiver of, any other right or remedy that such Person may be entitled to exercise. 5.5 DEFENSE OF THIRD PARTY CLAIMS BY SELLER. In the event of the assertion or commencement by any Person of any claim or Proceeding with respect to which Seller may become obligated to indemnify, hold harmless, compensate or reimburse any Purchaser Indemnitee pursuant to this Section 5, Seller shall defend such claim or Proceeding at its sole expense, in which case: (a) Seller shall proceed to defend such claim or Proceeding in a diligent manner with counsel reasonably satisfactory to Purchaser; (b) Purchaser shall make available to Seller any non-privileged documents and materials in the possession of Purchaser that may be necessary to the defense of such claim or Proceeding; (c) Seller shall endeavor to keep Purchaser informed of all material developments and events relating to such claim or Proceeding; (d) Purchaser shall have the right to participate, at its own cost, in the defense of such claim or Proceeding; (e) Purchaser shall cooperate with Seller, in a timely manner, in the defense of such claim or Proceeding; and (f) Seller shall have the right to settle, adjust or compromise such claim or Proceeding with the prior written consent of Purchaser; provided, however, that Purchaser shall not unreasonably withhold, delay or condition such consent. 27 5.6 DEFENSE OF THIRD PARTY CLAIMS BY PURCHASER. In the event of the assertion or commencement by any Person of any claim or Proceeding with respect to which Purchaser may become obligated to indemnify, hold harmless, compensate or reimburse any Seller Indemnitee pursuant to this Section 5, Purchaser shall defend such claim or Proceeding at its sole expense, in which case: (a) Purchaser shall proceed to defend such claim or Proceeding in a diligent manner with counsel reasonably satisfactory to Seller; (b) Seller shall make available to Purchaser any non-privileged documents and materials in the possession of Seller that may be necessary to the defense of such claim or Proceeding; (c) Purchaser shall endeavor to keep Seller informed of all material developments and events relating to such claim or Proceeding; (d) Seller shall have the right to participate, at its own cost, in the defense of such claim or Proceeding; (e) Seller shall cooperate with Purchaser, in a timely manner, in the defense of such claim or Proceedings; and (f) Purchaser shall have the right to settle, adjust or compromise such claim or Proceeding with the prior written consent of Seller; provided, however, that Purchaser shall not unreasonably withhold, delay or condition such consent. 5.7 EXERCISE OF REMEDIES BY INDEMNITEES. Notwithstanding anything herein to the contrary, no Indemnitee (other than Purchaser or any successor thereto or assign thereof for the Purchaser Indemnitees or Seller or any successor thereto or assign thereof for the Seller Indemnitees) shall be permitted to assert any indemnification claim or exercise any other remedy under this Agreement. SECTION 6. ADDITIONAL COVENANTS AND AGREEMENTS. 6.1 INTERIM CONDUCT OF THE BUSINESS. At all times from and after January 29, 1998 and through and including the Closing Date, Seller shall not deviate from its ordinary and customary operation, maintenance or management of the Purchased Assets and shall not engage in any transaction other than in the lawful, ordinary and usual course of business as heretofore conducted. Without limiting the foregoing, Seller shall maintain in full force and effect until the Closing Date a policy or policies of insurance on the Purchased Assets which provide a scope and amount of coverage which are usual and customary in Seller's business; not make any non-ordinary wage or salary increases or severance packages; subject to Purchaser's prior reasonable written approval, not make any material changes in its member billing practices or rates, or enter into any material third party 28 agreements; not declare, set aside, or make any dividend or distribution; not directly or indirectly purchase or redeem any interests in Seller; not pay any obligation other than current liabilities, not waive or compromise any claim or right, and not cancel, without full payment, any obligation; shall have directed Manager, from and after November 17, 1997, to sign Members only to Membership Contracts which provide for a term and payments of month-to-month or less; and not take, or omit to take, any action which would cause a default under the Master Lease. Seller shall maintain all of the Purchased Assets in good repair through Closing, ordinary wear and tear excepted. Without limiting the generality of the foregoing, Seller shall repair, at its sole cost and expense, all defects in the material or workmanship thereof prior to Closing. Seller shall remedy prior to Closing any and all violations of or any Legal Requirement relating to all or any part of the Purchased Assets of which Seller had Knowledge prior to Closing. Seller shall obtain promptly all government and third party consents and approvals to the consummation of the Transactions. From and after the date hereof until Closing, Seller shall lease or rent no space at the Real Property (including renewal of an existing tenancy) without Purchaser's prior approval, nor shall Seller otherwise deviate from its ordinary and customary operation, maintenance, or management of the Purchased Assets. Seller shall not further encumber the Purchased Assets or any part thereof, convey any interest therein (other than to Purchaser pursuant hereto) without Purchaser's prior consent, or accept any additional advance or funds secured or to be secured by any existing encumbrance on any of the Purchased Assets, or permit any encumbrance to which any part of the Purchased Assets is subject to become in default prior to Closing. Seller shall not enter into any new service, maintenance, supply or other contract affecting the Purchased Assets in any way prior to Closing without Purchaser's prior approval, unless such contract is cancelable at any time on thirty days' notice or less, without cost to Purchaser. 6.2 STANDSTILL BY SELLER. From and after January 29, 1998 and through and including the Closing and for so long as Purchaser shall not be in default under this Agreement, Seller shall not directly or indirectly, solicit or initiate discussions or engage in negotiations with, or provide any information to, or authorize any financial advisor or other person to solicit or initiate discussions or engage in negotiations with, or provide any such information to, any corporation, partnership, person or other entity or group (other than Purchaser) concerning any possible proposal regarding a sale of interests in or a merger, consolidation, sale of assets or other similar transaction involving, Seller or any division or asset of Seller pertaining to the Purchased Assets. 6.3 PURCHASER'S ACCESS. From January 28, 1998, through the Closing Date, Seller shall give Purchaser and its Representatives, or cause them to be permitted, during normal business hours and upon reasonable notice, full access to all properties, books, files, data, contracts, leases, commitments and records of Seller and the Club, and during this period Seller shall furnish Purchaser with all financial and operating data and all other information as to the business, properties and assets of Seller and the Club as Purchaser may from time to time reasonably request; provided, however, that such access and investigation shall not interfere with the conduct of the Club by Seller. At Purchaser's 29 reasonable request, Seller shall direct its Representatives to cooperate with Purchaser pursuant to this Section 6.3 at no additional cost to Purchaser. In undertaking its due diligence, Purchaser shall not disturb, to the minimum extent reasonably possible, the operations of the Club. The exercise by Purchaser of any of the preceding rights, or any other act of Purchaser, shall not negate any representation, warranty or covenant of Seller or modify any of Purchaser's rights or Seller's obligations in the event of any Breach by Seller of any of Seller's representations, warranties or covenants of this Agreement. Purchaser shall indemnify, defend and hold harmless Seller from and against any and all Damages arising out of any entry within the Club by Purchaser or its Representatives. The indemnification of Seller by Purchaser in the preceding sentence shall survive any termination of this agreement or the Closing for a period of 1 year from and after the date of termination or the Closing, as the case may be. 6.4 PRESERVATION OF BUSINESS AND RELATIONSHIPS. From January 29, 1998 until the Closing, Seller shall use its commercially reasonable efforts to preserve the Club's business and its organization intact, including without limitation to preserve Seller's present relationships with suppliers, customers and others having business relationships with Seller regarding the Club. Seller shall promptly arrange for utility telephone service to be transferred to Purchaser at Closing. 6.5 NO INCONSISTENT ACTION. Each of the parties hereto will use such party's commercially reasonable efforts to consummate the transaction contemplated by this Agreement and shall not take any action inconsistent with such party's obligations hereunder or which could hinder or delay the consummation of the transactions contemplated hereby. 6.6 DAMAGE OR DESTRUCTION. If prior to Closing the Purchased Assets shall sustain damage caused by fire or other casualty that is insured and that would cost One Hundred Thousand Dollars ($100,000) or more to repair or if any uninsured loss or casualty occurs that would cost One Hundred Thousand Dollars ($100,000) or more to repair, Purchaser may elect to terminate this Agreement as set forth in Section 1.8(b); it being agreed that the occurrence of any such damage shall require Seller to issue a Modification to Purchaser, as set forth in Section 1.8. If Purchaser does not so elect to terminate its obligations under this Agreement, or if the loss or casualty would cost less than One Hundred Thousand Dollars ($100,000) to repair, the Closing shall take place as provided herein, and Purchaser shall receive (i) a credit for the amount of Seller's deductible or retention and (ii) an assignment of Seller's rights to insurance proceeds with respect to any unrepaired damage (including any rental loss proceeds for periods after the Closing), loss or casualty in question, but subject to the rights of existing lienholders. Subject to such rights, Purchaser shall be entitled to settle the loss with Seller's insurers. Seller shall retain all interest in and to the insurance proceeds that may be payable to Seller on account of damage repaired and completed by Seller before Closing, but Seller shall have no obligation of repair or replacement. 30 6.7 CONDEMNATION. In the event that the Purchased Assets or any part thereof becomes the subject of a condemnation proceeding other than of a minor immaterial nature prior to Closing, Seller agrees to immediately advise Purchaser thereof. In the event of such condemnation, Purchaser shall have the option, pursuant to Section 1.8(b), to (1) take title in accordance with the terms and conditions of this Agreement and negotiate with the said condemning authority for the condemnation award and receive the benefits thereof without affecting the Purchase Price, or (2) terminate this Agreement. 6.8 LIQUOR LICENSE. Seller shall cooperate with Purchaser (without cost or liability to Seller) in Purchaser's obtaining a transfer of any existing liquor license for the Club or, if such transfer shall not be possible, obtaining a new liquor license; to Seller's Knowledge, there is no such liquor license currently existing. 6.9 [Intentionally omitted] 6.10 FIRPTA AFFIDAVIT. At or prior to Closing, Seller shall provide to Purchaser an affidavit signed under penalty of perjury and complying with the requirements of U.S. Internal Revenue Code Section 1445(b)(2) and an equivalent Form 590RE provided under the Revenue and Taxation Code of the State of California. If Seller shall not have timely furnished to Purchaser said affidavit, Purchaser may, at its option, either (i) adjourn the closing until such time as Seller has complied with the conditions set forth herein, and such adjournment shall not place Purchaser in default of its obligations hereunder, or alternatively (ii) Purchaser may withhold from the Purchase Price and remit to the Internal Revenue Service and the Franchise Tax Board such withholding as may be required of Purchaser in accordance with the withholding obligations imposed upon Purchaser pursuant to Internal Revenue Code Section 1445 and equivalent statutes under the Revenue and Taxation Code of the State of California. Such withholding shall not place Purchaser in default under this Agreement, and Seller shall not be entitled to claim that such withholding shall excuse Seller's performance under this Agreement. 6.11 SEC REQUIRED FINANCIAL INFORMATION. At Purchaser's request at any time from and after January 28, 1998 until the date that is one (1) year after the Closing Date, Seller shall, at Purchaser's expense, provide to Purchaser's designated independent auditor reasonable access to the books and records of the Purchased Assets, regarding the period for which Purchaser is required to have audited financial statements prepared with respect to the Purchased Assets as may be required by the Securities and Exchange Commission, but only to the extent that such books, records and related information are in Seller's possession or control and relate to the period during which Seller held title to the Purchased Assets. 6.12 INVESTMENT IN THE CLUB. Within thirty (30) months after the Closing Date, but subject to force majeure and any delay caused by any Governmental Body, Legal Requirement, Order or Proceeding, Purchaser shall spend, or cause to be spent, no less than ten million dollars ($10,000,000) on improvements to the Club, inclusive of fixtures, furnishings and equipment. 31 SECTION 7. MISCELLANEOUS PROVISIONS. 7.1 FURTHER ASSURANCES. Each party hereto shall execute and/or cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out or evidencing any of the Transactions. Without limiting the generality of the foregoing, at any time and from time to time after the Closing Date, the parties shall duly execute, acknowledge and deliver all such further assignments, conveyances, instruments and documents, and will take such other action consistent with the terms of this Agreement, in each case, as may be reasonably necessary to assign, transfer and convey to Purchaser good and marketable title to any and all of the Purchased Assets, free and clear of all Encumbrances, to carry out the transactions contemplated by this Agreement, and to comply with the terms hereof. No party will take or knowingly permit to be taken any action or do or knowingly permit to be done anything in the conduct of its business, or otherwise, which would be contrary to or in breach of any of the terms or provisions of this Agreement, or which would cause any of the representations or warranties contained herein to become untrue or incomplete. Each party agrees to cause its Affiliates to comply with any obligations hereunder for which the assistance of such Affiliate is necessary or advisable and to take any other action which may be necessary or reasonably requested by the other party in order to consummate the Transactions. 7.2 ATTORNEYS' FEES. If any legal action or other legal proceeding relating to any of the Transactional Agreements or the enforcement of any provision of any of the Transactional Agreements is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys' and expert witness fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled). Attorneys' fees incurred in enforcing any judgment in respect of this Agreement are recoverable as a separate item. The preceding sentence is intended to be severable from the other provisions of this Agreement and to survive any judgment and, to the maximum extent permitted by law, shall not be deemed merged into any such judgment. 7.3 NOTICES. Any notice or other communication required or permitted to be delivered to any party under this Agreement shall be in writing and shall be deemed properly delivered, given and received when delivered (by hand, by registered or certified mail, return receipt requested, by courier or express delivery service or by telecopier with proof of transmission and receipt) to the address or telecopier number set forth beneath the name of such party below (or to such other address or telecopier number as such party shall have specified in a written notice given to the other parties hereto). In the case of any notice given by telecopier, a confirming copy shall be sent, as soon as reasonably possible thereafter, by another approved means specified above. 32 if to Purchaser: RM Sports Club, Inc. 11100 Santa Monica Boulevard, Suite 300 Los Angeles, California 90025 Attention: Chief Executive Officer, President and Real Estate Notices Telephone: (310) 479-5200 Telecopier: (310) 479-4350 with a copy (not constituting notice) to: Resch Polster Alpert & Berger LLP 10390 Santa Monica Boulevard Fourth Floor Los Angeles California 90025-5058 Attention: Ronald M. Resch, Esq. Telephone: (310) 277-8300 Telecopier: (310) 552-3209 if to Seller: Hilton Hotels Corporation 9336 Civic Center Drive Beverly Hills, California 90210 Attention: Chief Financial Officer Telephone: 310/278-4321 Telecopier: 310/205-4611 with a copy (not constituting notice) to. Hilton Hotels Corporation 9336 Civic Center Drive Beverly Hills, California 90210 Attention: General Counsel Telephone: 310/278-4321 Telecopier: 310/205-4613 if to Deposit Holder: Chicago Title Company 700 South Flower Street, #920 Los Angeles, California 90017 Attention: Rose Martinez re escrow no. 7151506X43 Telephone: 213/488-4300 Telecopier: 213/488-4384 with a copy (not constituting notice) to the party or parties not giving such notice to Deposit Holder. 33 If notice is sent by telecopier, a copy of such notice shall be concurrently sent by one of the other means set forth in this section. Failure to do so will not affect the validity and due delivery of such notice. 7.4 PUBLICITY; CONFIDENTIALITY. At all times before and after the Closing Date and except as may otherwise be required by any Legal Requirement or by the rules and regulations of the New York Stock Exchange, the American Stock Exchange, NASDAQ or the Securities and Exchange Commission: (a) Prior to the Closing, no press release or other publicity concerning any of the Transactions shall be issued or otherwise disseminated by or on behalf of the parties hereto unless mutually agreed upon by the parties in advance. The parties shall issue a mutually approved press release promptly following Closing. Each of the parties shall continue to keep the existence and terms of this Agreement and the other Transactional Agreements strictly confidential except to the extent such information is publicly available, lawfully obtained from independent sources or as may be required by any Legal Requirement or as may otherwise be determined by Purchaser, in good faith, to be appropriate. (b) Prior to the Closing, Purchaser agrees to keep confidential and not to disclose to any third party, other than to Purchaser's actual or potential lenders or investors or their Representatives, who in turn will agree to hold such information confidential, any information and material obtained from Seller or any of its Representatives or to which Purchaser has access related to the business and assets of Seller except to the extent such information is publicly available, previously lawfully known to Purchaser, lawfully obtained from independent sources or as may be required by any Legal Requirement. No such information shall be used by any such party for their own benefit. Purchaser will promptly return, and cause all of its actual and potential lenders, investors and each of its and their respective Representatives promptly to return, any and all such information to Seller if Closing does not occur, for any reason whatsoever. (c) Prior to the Closing, Seller agrees to keep confidential and not to disclose to any third party, other than to Seller's actual or potential lenders or investors or their Representatives, who in turn will agree to hold such information confidential, any information and material obtained from Purchaser or any of their respective Representatives or to which Seller has access related to the business and assets of Purchaser except to the extent such information is publicly available, previously lawfully known to Seller, lawfully obtained from independent sources or as may be required by any Legal Requirement. No such information shall be used by any such party for their own benefit. Seller will promptly return, and cause all of its actual and potential lenders, investors and each of its and their respective Representatives promptly to return, any and all such information to Purchaser if Closing does not occur, for any reason whatsoever. 7.5 NONCOMPETITION/NONSOLICITATION. 34 (a) Seller agrees that, after the Closing, Purchaser shall be entitled to the goodwill and going concern value of the Club and to protect and preserve the same to the maximum extent permitted by law. Seller also acknowledges that its management contributions to the Club have been uniquely valuable and that Seller has proprietary information that would be competitively unfair to make available to any competitor of the Club. For these and other reasons, and as an inducement to Purchaser to enter into this Agreement, for a period of 3 years from and after the Closing Date neither Seller nor any Entity in which Seller shall be the real party in interest shall own or manage any health or fitness or other similar facility located within Manhattan. It shall not, however, be a breach of this Section 7.5(a) if Seller, or any Entity in which Seller shall be the real party in interest shall own or manage any health or fitness or other similar facility of less than 20,000 square feet located within any hotel as an ancillary service for guests of such hotel. (b) In addition, to protect Purchaser against any efforts by Seller to cause employees and/or independent contractors of the Club to terminate their employment, Seller agrees that for a period of 5 years from and after the Closing Date, neither Seller nor any Entity in which Seller shall be the real party in interest shall, directly or indirectly, (i) induce any employee or independent contractor of the Club to leave the Club or to accept any other employment or position or (ii) assist any other Entity in hiring such person. (c) Seller recognizes and agrees that a breach by Seller, or any Entity in which Seller shall be the real party in interest, of any of the covenants set forth in this Section 7.5 could cause irreparable harm to Purchaser, that Purchaser's remedies at law in the event of such breach would be inadequate, and that, accordingly, in the event of such breach a restraining order or injunction or both may be issued against Seller or any such Entity, in addition to any other rights and remedies which are available to Purchaser. If this section is more restrictive than permitted by the Legal Requirements of any jurisdiction in which Purchaser seeks enforcement hereof, then this Section 7.5 shall be limited to the extent required to permit enforcement thereunder. In particular, the parties intend that the covenants contained in the preceding portions of this Section 7.5 shall be construed as a series of separate covenants, one for each county and city within the radius described above. Except for geographic coverage, each such separate covenant shall be deemed identical in terms. If, in any judicial proceeding, a court shall refuse to enforce any of these separate covenants deemed included in this paragraph, then such unenforceable covenant shall be deemed eliminated from these provisions for the purpose of those proceedings to the extent necessary to permit the remaining separate covenants to be enforced. (d) No consideration shall be allocated to the covenants set forth in this Section 7.5. 7.6 TIME OF THE ESSENCE. In connection with consummation of the Acquisition and the Transactions, the parties agree that time is of the essence; provided, however, that if any period or time set forth in this Agreement ends or occurs on a day 35 which is not a Business Day, then such period or time shall instead end on the next immediately following Business Day. 7.7 HEADINGS. The underlined headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement. 7.8 COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. 7.9 GOVERNING LAW; VENUE. This Agreement shall be construed in accordance with, and governed in all respects by the internal laws of the State of California (without giving effect to principles of conflicts of laws). The exclusive venue for any dispute arising out of this letter shall be in either the federal or state courts located within Los Angeles County, California. Each party waives the defense of forum non conveniens or any similar doctrine. Service of process may be made in accordance with the applicable local rules. 7.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon: the Seller and its successors and assigns (if any); and Purchaser and its successors and assigns (if any). This Agreement shall inure to the benefit of: Seller; Purchaser; and the respective successors and assigns (if any) of the foregoing. Purchaser may only assign all of its rights under this Agreement (including its indemnification rights under Section 5.2, and not any part thereof, and then only if (a) the proposed assignee is The Sports Club Company, Inc., and (b) Seller is provided with a written assignment and assumption agreement, in the form attached hereto as Exhibit H (the "Assignment and Assumption"), executed by Purchaser and such assignee and pursuant to which such assignee assumes all of Purchaser's rights, duties and obligations under the Transactional Agreements. Any such permitted assignment and assumption shall relieve Purchaser of all of its duties and obligations under the Transactional Agreement. 7.11 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and remedies of the parties hereto shall be cumulative (and not alternative). Seller agrees that in the event of any Breach or threatened Breach by Seller of any covenant, obligation or other provision set forth in this Agreement, Purchaser shall be entitled (in addition to any other remedy that may be available to it) to (i) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision, and (ii) an injunction restraining such Breach or threatened Breach. 7.12 NO CONSEQUENTIAL DAMAGES. Notwithstanding anything to the contrary that may be contained elsewhere in this Agreement, no party (or its Affiliates) shall, in any event, be liable to any other party (or its Affiliates) for any consequential damages including, 36 but not limited to, loss of revenue or income, cost of capital, or loss of business reputation or opportunity relating to the breach or alleged breach of this Agreement. 7.13 WAIVER. (a) Except as expressly set forth herein, no failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. (b) Except as expressly set forth herein, no Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person: and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given. 7.14 AMENDMENTS. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of Purchaser and Seller. 7.15 SEVERABILITY. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law. 7.16 PARTIES IN INTEREST. Except for the provisions of Section 5 hereof, none of the provisions of this Agreement is intended to provide any rights or remedies to any Person other than the parties hereto and their respective successors and assigns (if any). 7.17 ENTIRE AGREEMENT. The Transactional Agreements set forth the entire understanding of the parties relating to the subject matter thereof and supersede all prior agreements and understandings among or between any of the parties relating to the subject matter thereof. 7.18 BROKERS. Purchaser and Seller each represents and warrants to the other that the representing party has not been represented by or dealt with any broker in connection with the Acquisition. Purchaser and Seller each agrees to indemnify, defend and hold the other harmless from any Damages arising out of or in connection with any claim for 37 any brokerage commission, finder's fee, acquisition fee or like payment asserted against the indemnified party by virtue of any action taken or allegedly taken by the indemnifying party in connection with the Acquisition. 7.19 CONSTRUCTION. (a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include the masculine and feminine genders. (b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement. (c) As used in this Agreement, the words "include" and "including," and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words "without limitation." (d) Except as otherwise indicated, all references in this Agreement to "Sections", "Exhibits" and "Schedules" are intended to refer to Sections of this Agreement and Exhibits and Schedules to this Agreement, all of which Exhibits and Schedules are hereby incorporated herein by this reference as if set forth fully herein. 7.20 WAIVER OF JURY. With respect to any dispute arising under or in connection with this Agreement or any related agreement, as to which no party invokes the right to arbitration hereinabove provided, or as to which legal action nevertheless occurs, each party hereby irrevocably waives all rights it may have to a jury trial, and each party agrees that it will not seek to consolidate any such action in which a jury trial has been waived with any other action in which a jury trial cannot be or has not been waived. THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE BY PURCHASER AND SELLER AND EACH ACKNOWLEDGES THAT NEITHER THE OTHER PARTY NOR ANY PERSON ACTING ON BEHALF OF THE OTHER PARTY HAS MADE ANY REPRESENTATION OF FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. PURCHASER AND SELLER EACH FURTHER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER, BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. PURCHASER AND SELLER EACH FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION. 38 7.21 AUTHORITY TO SIGN. Each of the individuals executing this Agreement on behalf of Purchaser and Seller, respectively, represents that he is duly and validly authorized to do so. 7.22 SURVIVAL POST-CLOSING. Any provisions of this Agreement, or any other Transactional Agreement, which require observance, performance or enforcement after Closing shall survive Closing and shall continue to be binding on the parties hereto, subject to and in accordance with the other terms and conditions of this Agreement and the other Transactional Agreements. 7.23 FACSIMILE SIGNATURES. Purchaser and Seller each (i) has agreed to permit the use, from time to time and where appropriate, of telecopied signatures in order to expedite the transaction contemplated by this Agreement, (ii) intends to be bound by its respective telecopied signature, (iii) is aware that the other party will rely on the telecopied signature, and (iv) acknowledges such reliance and waives any defenses to the enforcement of the documents and notices effecting the transaction contemplated by this Agreement based on the fact that a signature or notice was sent by telecopy. The parties hereto have caused this Asset Purchase Agreement to be executed and delivered as of the date first written above. SELLER: Hilton Hotels Corporation, A Delaware corporation By: /s/ Matt J. Hart --------------------------------- Its: SVP & CFO --------------------------------- PURCHASER: RM SPORTS CLUB, INC. a California corporation By: /s/ David M. Talla --------------------------------- Its: CEO --------------------------------- 39 The undersigned hereby executes this Agreement to evidence its agreement to act as Escrow Holder in accordance with the terms of this Agreement. AGREED AND ACCEPTED: Escrow Holder: CHICAGO TITLE COMPANY By /s/ Ron May ----------------------------------- Its Senior Loan Officer --------------------------------- 40 Exhibit A CERTAIN DEFINITIONS For purposes of the Agreement (including this Exhibit A): 1. ACQUISITION. "Acquisition" shall have the meaning specified in Recital A of the Agreement. 2. ACQUISITION TRANSACTION. "Acquisition Transaction" shall mean any transaction involving the sale or other disposition of all or any portion of the Club's business or assets (other than in the Ordinary Course of Business). 3. ACT. "Act" shall have the meaning set forth in Section 2.19(a) of the Agreement. 4. AFFILIATE. "Affiliate" shall mean and include any Entity, directly or indirectly, controlling Seller, controlled by Seller or under common control with Seller; it being agreed that, for these purposes, "control" shall mean the ability to direct Seller, whether by reason of the ownership of equity interests in Seller, by contract or otherwise. 5. ASSIGNMENT AND ASSUMPTION. "Assignment and Assumption" shall have the meaning set forth in Section 7.10. 6. ASSUMED CONTRACTS. Assumed Contracts shall have the meaning set forth in Section l.l(e). 7. ASSUMED LIABILITIES. Assumed Liabilities shall have the meaning set forth in Section 1.3. 8. BILL OF SALE. "Bill of Sale" shall have the meaning set forth in Section 1.5(a) of the Agreement. 9. BREACH. There shall be deemed to be a "Breach" of a representation, warranty, covenant, obligation or other provision if there is or has been any inaccuracy in or breach of, or any failure to comply with or perform such representation, warranty, covenant, obligation or other provision; and the term "Breach" shall be deemed to refer to any such inaccuracy, breach or failure. 10. BUSINESS DAY. "Business Day" shall mean any day other than Saturday, Sunday or any other day which is a legal holiday under the laws of either the State of California or, if different, the state where the Club is located. 11. CLOSING. "Closing" shall have the meaning specified in Section 1.9(b) of the Agreement. 12. CLOSING DATE. "Closing Date" shall mean the date on which the Closing shall occur. 13. CLUB. "Club" shall have the meaning specified in Recital A of the Agreement. 14. CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended. __________ __________ Initials PAGE 1 Initials 41 15. CONSENT. "Consent" shall mean any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization). 16. CONTRACT. "Contract" shall mean any written agreement, contract, understanding, arrangement instrument, note, guaranty, indemnity, representation, warranty, deed, assignment, power of attorney, certificate, purchase order, work order, insurance policy, benefit plan, commitment covenant, assurance or undertaking of any nature that relate to the Purchased Assets. 17. CONTRACT ASSIGNMENT. "Contract Assignment" shall have the meaning set forth in Section 1.5(a) of the Agreement. 18. DAMAGES. "Damages" shall mean any loss, damage, injury, Liability, claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including any reasonable legal fee, expert fee, accounting fee or advisory fee), charge, reasonable cost (including any reasonable cost of investigation) or reasonable expense of any nature. 19. DELIVERY ITEMS. "Delivery Items" shall have the meaning set forth in Section 1.6 of the Agreement. 20. DEPOSIT. "Deposit" shall have the meaning set forth in Section 1.5(b) of the Agreement. 21. DEPOSIT HOLDER. "Deposit Holder" shall have the meaning set forth in Section 1.5(b) of the Agreement. 22. DUE DILIGENCE PERIOD. "Due Diligence Period" shall have the meaning set forth in Section 1.8(a)(vi) of the Agreement. 23. ENCUMBRANCE. "Encumbrance" shall mean any lien, pledge, hypothecation, charge, mortgage, security interest, encumbrance, claim, right of possession, lease, tenancy, license, Order, option, right of first refusal, imperfection of title, or Tax; provided that Encumbrance shall not include publicly recorded Encumbrances (i) that are not liens or (ii) that do not restrict or affect the intended use of the Purchased Assets. Encumbrance shall further not include any Taxes that are not yet due and payable if such Taxes are to be prorated between Purchaser and Seller. Encumbrance shall further not include any matter disclosed in the Disclosure Schedule and expressly approved in writing by Purchaser as not constituting an Encumbrance or any Permitted Exception. 24. ENTITY. "Entity" shall mean any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability company, joint venture, estate, trust, cooperative, foundation, society, political party, union, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. 25. ESCROW. "Escrow" shall have the meaning set forth in Section 1.5(b) of the Agreement. 26. EXCLUDED ASSETS. "Excluded Assets" shall have the meaning set forth in Section 1.2 of the Agreement. __________ __________ Initials PAGE 2 Initials 42 27. EXCLUDED CONTRACT. "Excluded Contract" shall mean any Seller Contract, other than the Membership Agreements, that: (a) Seller has entered into in the Ordinary Course of Business; (b) has a term of less than 30 days or may be terminated by the Seller (without penalty) 30 days after the delivery of a termination notice by the Seller; and (c) does not contemplate or involve the payment of cash or other consideration in an amount or having a value in excess of $10,000. 28. GAAP. "GAAP" shall mean generally accepted accounting principles, applied on a basis consistent with the basis on which the applicable financial statements were prepared. 29. GOVERNMENTAL AUTHORIZATION. "Governmental Authorization" shall mean any: (a) permit, license, certificate, franchise, concession, approval, consent, ratification, permission, clearance, confirmation, endorsement, waiver, certification, designation, rating, registration, qualification or authorization issuable or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement; or (b) right under any Contract with any Governmental Body. 30. GOVERNMENTAL BODY. "Governmental Body" shall mean any: (a) nation, principality, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission council, board, instrumentality, officer, official, representative, organization, unit, body or Entity and any court or other tribunal); (d) multi-national organization or body; or (e) individual, Entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature. 31. INDEMNITEES. "Indemnitees" shall as the context may indicate sometimes refer to either the Purchaser Indemnitees or the Seller Indemnitees, or both. 32. INVENTORY. "Inventory" shall have the meaning set forth in Section 1.1(j) of the Agreement. 33. LEASES. "Leases" shall have the meaning set forth in Section 2.7(a) of the Agreement. __________ __________ Initials PAGE 3 Initials 43 34. LEASE ASSIGNMENT. "Lease Assignment" shall have the meaning set forth in Section 1.5(a) of the Agreement. 35. LEGAL REQUIREMENT. "Legal Requirement" shall mean any federal, state local, municipal, foreign or other law, statute, legislation, constitution, law resolution, ordinance, code edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation issued enacted adopted, passed, approved, promulgated, made, implemented or otherwise put into effect by or under the authority of any Governmental Body. 36. LIABILITY. "Liability" shall mean any debt, obligation, duty or liability of any nature (whether known or unknown and whether absolute, accrued, contingent or otherwise), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with GAAP and regardless of whether such debt obligation, duty or liability is immediately due and payable. 37. MANAGEMENT AGREEMENT. "Management Agreement" shall mean that certain Management Agreement, dated January 9, 1996, by and between Manager and Bally Entertainment Corporation, as owner. Seller is the successor to Bally Entertainment Corporation under the Management Agreement. 38. MANAGER. "Manager" shall mean Bally Total Fitness Holding Corporation (f/k/a Bally's Health & Tennis Corporation), a Delaware corporation. 39. MANAGER'S ESTOPPEL CERTIFICATE. "Manager's Estoppel Certificate" shall mean an estoppel certificate executed by Manager. 40. MASTER LANDLORD. "Master Landlord" shall mean Hirschfeld Realty Club Corporation and 328 East 61 Corp. 41. MASTER LEASE. "Master Lease" shall mean, collectively, the following three documents: (i) that certain Amended and Restated Net Operating Lease, dated March 26, 1985, among, on the one hand, Master Landlord, as Landlord, and, on the other hand, Vertical Fitness and Racquet Club, Ltd., as Tenant, (ii) that certain Lease Modification Agreement dated July 1, 1990, among, on the one hand, Master Landlord and, on the other hand, Vertical Fitness and Racquet Club, Ltd., and (iii) that certain Assignment and Assumption of Lease, dated January 8, 1996, between Vertical Fitness and Racquet Club, Ltd. and Bally Entertainment Corporation, in each instance, regarding the premises occupied by the Club. Seller is the successor tenant to Bally Entertainment Corporation under the Master Lease by merger with Bally Entertainment Corporation. 42. MEMBER. "Member" shall mean an individual who as of the Closing Date is a member in good standing of the Club under the terms of a valid Membership Agreement. 43. MEMBERSHIP AGREEMENT. "Membership Agreement" shall mean any written agreement between a Member and, or on behalf of, the Seller pursuant to which such Member is entitled to use of the facilities and services of the Seller at the Club. 44. MODIFICATION. "Modification" shall have the meaning set forth in Section 1.8(b) of the Agreement. __________ __________ Initials PAGE 4 Initials 44 45. NOTE. "Note" shall have the meaning set forth in Section 1.5(c). 46. ORDER. "Order" shall mean any: (a) order, judgment, injunction, edict, decree, ruling, pronouncement, determination, decision, opinion, verdict, sentence, subpoena, writ or award issued, made, entered, rendered or otherwise put into effect by or under the authority of any court, administrative agency or other Governmental Body or any arbitrator or arbitration panel; or (b) Contract with any Governmental Body that is or has been entered into in connection with any Proceeding. 47. ORDINARY COURSE OF BUSINESS. An action taken by or on behalf of the Seller shall not be deemed to have been taken in the "Ordinary Course of Business" unless (a) such action is generally consistent with the Seller's past practices and is taken in the ordinary course of the Seller's normal day-to-day operations; and (b) such action is not required to be authorized by the Seller's stockholders, the Seller's board of directors or any committee of the Seller's board of directors and does not require any other separate or special authorization of any nature. 48. OUTSIDE CLOSING DATE. "Outside Closing Date" shall have the meaning set forth in Section 1.9(a) of the Agreement. 49. PERSON. "Person" shall mean any individual, Entity or Governmental Body. 50. PERSONAL PROPERTY LEASES. "Personal Property Leases" shall have the meaning set forth in Section 1.1(c) of the Agreement. 51. PROCEEDING. "Proceeding" shall mean any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation brought, conducted or heard by or before, or that otherwise involves, any Governmental Body, judge, arbitrator or arbitration panel. 52. PURCHASE PRICE. "Purchase Price" shall have the meaning set forth in Section 1.5(a) of the Agreement. 53. PURCHASED ASSETS. "Purchased Assets" shall have the meaning set forth in Section 1.1 of the Agreement. 54. PURCHASER. "Purchaser" shall mean RM Sports Club, Inc., a California corporation. 55. PURCHASER DELIVERY ITEMS. "Purchaser Delivery Items" shall have the meaning set forth in Section 1.6(b) of the Agreement. __________ __________ Initials PAGE 5 Initials 45 56. PURCHASER INDEMNITEES. "Purchaser Indemnitees" shall mean the following Persons: (a) Purchaser; (b) Purchaser's current and future Affiliates and its and their respective shareholders, officers, directors and employees; (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and permitted assigns of the Persons referred to in clauses (a), (b), and (c) above. 57. PURCHASER TRANSACTION COSTS. "Purchaser Transaction Costs" shall have the meaning specified in Section 1.10(b)(iii) of the Agreement. 58. REAL PROPERTY. "Real Property" shall have the meaning specified in Section 1.1(a) of the Agreement. 59. REAL PROPERTY LEASES. "Real Property Leases" shall have the meaning set forth in Section 1.1(b). 60. REPRESENTATIVES. "Representatives" shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives. Seller and all other Related Parties shall be deemed to be "Representatives" of Seller. 61. SELLER. "Seller" shall mean Hilton Hotels Corporation, a Delaware corporation. 62. SELLER CONTRACT. "Seller Contract" shall mean any Contract: (a) to which the Seller is a party; (b) by which the Seller or any of its assets is bound or under which the Seller has any obligation; or (c) under which the Seller has any right or interest. 63. SELLER DELIVERY ITEMS. "Seller Delivery Items" shall have the meaning set forth in Section 1.6(b) of the Agreement. 64. SELLER INDEMNITIES. "Seller Indemnities" shall mean the following Persons: (a) Seller; (b) Seller's current and future Affiliates and its and their respective shareholders, officers, directors and employees; __________ __________ Initials PAGE 6 Initials 46 (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and permitted assigns of the Persons referred to in clauses (a), (b) and (c) above. 65. SELLER'S KNOWLEDGE. "Seller's Knowledge" shall mean the actual knowledge of either Kevin Luebbers or Barbara Boultinghouse. 66. SELLER TRANSACTION COSTS. "Seller Transaction Costs" shall have the meaning specified in Section 1.10(a)(vi) of the Agreement. 67. SERVICE MARK LICENSE AGREEMENT. "Service Mark License Agreement" shall mean that certain Service Mark License Agreement, dated January 9, 1996, between Manager and Bally Entertainment Corporation. 68. SPECIFIED CONTRACTUAL LIABILITIES. "Specified Contractual Liabilities" shall mean the obligations of the Seller under the Assumed Contracts, but only to the extent such obligations (a) arise after the Closing Date, (b) do not arise from or relate to any breach by, or on behalf of, the Seller of any provision of any of such contracts, (c) do not arise from or relate to any event, circumstance or condition occurring or existing on or prior to the Closing Date that, with notice or lapse of time, would constitute or result in a breach of, any of such contracts, and (d) are ascertainable (in nature and amount) solely by reference to the express terms of such contracts; provided, however that notwithstanding anything contained herein or in the Agreement, the "Specified Contractual Liabilities" shall not include and Purchaser shall not be required to assume or to perform or discharge, except if and to the extent the same shall have been prorated as part of the Closing in favor of Purchaser or except as may otherwise be expressly provided in the Agreement: (i) any Liability with respect to any accounts payable or any short-term or long-term indebtedness of the Seller; (ii) any Liability of the Seller arising from or relating to any action taken by the Seller, or any failure on the part of the Seller to take any action, at any time prior to, on or after the Closing Date; (iii) any Liability of the Seller arising from or relating to (x) any services performed or provided by the Seller, or (y) any claim, Order or Proceeding against the Seller; (iv) any Liability of the Seller for the payment of any Tax; (v) any Liability of the Seller to any employee or former employee of the Seller (whether for salaries, wages, severance pay, vacation pay, benefits or other compensation); (vi) any Liability under any Contact, if (x) an accurate and complete copy, in all material respects, of such Contract and all amendments thereto insofar as it and they pertain to such liability shall not have been furnished to Purchaser by the Seller prior to the Closing Date or (y) any Consent required to be obtained from any Person with respect to the assignment or delegation to __________ __________ Initials PAGE 7 Initials 47 Purchaser of any rights or obligations under such Contract shall not have been obtained prior to the Closing Date; (vii) any obligation of the Seller to indemnify or defend any other Person against or in connection with any infringement claim or similar claim; (viii) any Liability that is inconsistent with or that constitutes an inaccuracy in, or that arises or exists by virtue of any Breach of, any covenant or obligation of the Seller; or (ix) any other Liability that is not specifically included in the Specified Contractual Liabilities or otherwise is not expressly assumed by Purchaser in the Agreement. 69. SUBLEASE. "Sublease" shall mean any sublease, license agreement, concession agreement or other agreement, written or oral, pursuant to which any Person, other than a Member, has any right to occupy or use any portion of the Club for any purpose whatsoever. 70. SUBTENANT. "Subtenant" shall mean any party having the right to use or occupy any portion of the Club under any Sublease. 71. TAX. "Tax" shall mean any tax (including any income tax, franchise tax, capital gains tax, estimated tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem tax transfer tax, stamp tax, sales tax, use tax, property tax, business tax, occupation tax, inventory tax, occupancy tax, withholding tax or payroll tax), levy, assessment, tariff, impost, imposition, toll, duty (including any customs duty), deficiency or fee, and any related charge or amount (including any fine, penalty or interest), (a) imposed, assessed or collected by or under the authority of any Governmental Body, or (b) payable pursuant to any tax-sharing agreement or similar Contract. 72. TITLE COMPANY. "Title Company" shall mean Chicago Title Company. 73. TRANSACTIONAL AGREEMENTS. "Transactional Agreements" shall mean: (a) the Agreement; (b) the Contract Assignment; (c) the Lease Assignment; (d) the Bill of Sale; (e) the Note; and (f) the Assignment and Assumption. 74. TRANSACTION COSTS. "Transaction Costs" shall mean all fees, costs and expenses (including all legal, auditing, accounting and investment banking expenses) that have been incurred or that are in the future incurred by, on behalf of or for the benefit of any party hereto in connection with: __________ __________ Initials PAGE 8 Initials 48 (a) the negotiation, preparation and review of any letter of intent or similar document relating to any of the Transactions; (b) the investigation and review conducted by the Purchaser and its Representatives with respect to the Seller's business; (c) the negotiation, preparation and review of this Agreement (including the Disclosure Schedule), the other Transactional Agreements and all certificates, opinions and other instruments and documents delivered or to be delivered in connection with the Transactions; (d) the preparation and submission of any filing or notice required to be made or given in connection with any of the Transactions, and the obtaining of any Consent required to be obtained in connection with any of the Transactions; and (e) the consummation and performance of the Transactions. 75. TRANSACTIONS. "Transactions" shall mean (a) the execution and delivery of the respective Transactional Agreements, and (b) all of the transactions contemplated by the respective Transactional Agreements, including: (a) the Acquisition in accordance with the Agreement; and (b) the performance by Seller and Purchaser of their respective obligations under the Transactional Agreements and the exercise by the Seller and Purchaser of their respective rights under the Transactional Agreements. 76. WARN ACT. "WARN Act" shall mean the Workers Adjustment and Retraining Notification Act, 29 U.S.C. 2201, as amended and all rules, regulations, directives and orders promulgated thereunder. __________ __________ Initials PAGE 9 Initials EX-10.72 11 EXHIBIT 10.72 1 EXHIBIT 10.72 ASSIGNMENT AND ASSUMPTION OF ASSET PURCHASE AGREEMENT APRIL 1, 1998 2 ASSIGNMENT AND ASSUMPTION OF ASSET PURCHASE AGREEMENT This Assignment and Assumption of Asset Purchase Agreement (the "ASSIGNMENT") is made and entered into as of April 1, 1998, by and between RM Sports Club, Inc., a California corporation ("ASSIGNOR"), and The Sports Club Company, Inc., a Delaware corporation ("ASSIGNEE"), with regard to the following facts and circumstances: A. Assignor is the "Purchaser" under that certain Asset Purchase Agreement dated as of April 1, 1998 (the "PURCHASE AGREEMENT") between Assignor and Hilton Hotels Corporation, a Delaware corporation ("SELLER"), whereby Assignor agreed to purchase from Seller and Seller agreed to sell to Assignor the assets described in the Agreement and used or held for use by Seller in the operation of The Vertical Club located at 61st Street, New York, New York. B. Pursuant to Paragraph 7.10 (Successors and Assigns) of the Purchase Agreement, Assignor has the right to assign its rights in the Purchase Agreement to Assignee, without the consent of Seller. C. The consummation of the acquisition contemplated by the Purchase Agreement will not cause Assignee to become bankrupt or to be subject to any creditor's rights action. D. Assignor and Assignee now desire to provide for the assignment of all of Assignor's right, title and interest in and to the Purchase Agreement to Assignee, and the assumption by Assignee of all of the obligations of Assignor, as Purchaser, under the Agreement, upon the terms hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Assignor and Assignee hereby agree as follows: 1. As of the date of the Agreement, Assignor hereby sells, grants, assigns, conveys and transfers to Assignee all of Assignor's right, title and interest, as Purchaser, in and to the Agreement, and Assignee hereby accepts such assignment from Assignor and assumes the performance of all of the terms, covenants and obligations imposed on Assignor, as Purchaser, under the Agreement. 2. Assignee shall reimburse Assignor for any cash deposit (together with the interest earned thereon) made by Assignor under the Purchase Agreement and held by the escrow holder named therein. 3. Assignor and Assignee hereby acknowledge and agree that, as of the date of the Purchase Agreement, Assignor shall be released from all obligations and liabilities under the Purchase Agreement, except as expressly provided therein, and Assignee shall be obligated to Seller under all of the terms of the Purchase Agreement. 4. Assignee hereby agrees to indemnify, defend and hold Assignor harmless from and against any and all losses, liabilities, damages, claims, costs and expenses (including actual attorneys' fees and costs, and court costs) arising out of or in connection with the Agreement (except to the extent that Assignor has an interest in Assignee, if any, and then as limited by such interest). - -------- -------- Initials Initials 3 5. Assignor and Assignee each hereby agree to execute such other documents and perform such other actions as may be reasonably necessary or desireable to effectuate the intent of this Assignment. 6. This Assignment shall be binding upon and shall inure to the benefit of the heirs, executors, administrators, successors and assigns of the parties hereto. 7. This Assignment shall be governed by and construed in accordance with the laws of the State of California. 8. If any term or provision of this Assignment is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity of the remainder of this Assignment. 9. This Assignment may be executed in multiple counterparts, each of which shall be deemed an original and all of which shall constitute one and the same Assignment. IN WITNESS WHEREOF, Assignor and Assignee executed this Assignment as of the date first set forth above. "ASSIGNOR:" RM SPORTS CLUB, INC., a California corporation By: /s/ Michael Talla ------------------------------------- Its: CEO -------------------------------- "ASSIGNEE:" THE SPORTS CLUB COMPANY, INC., a Delaware corporation By: /s/ John Gibbons ------------------------------------- Its: President -------------------------------- - ------------- ------------- Initials Initials EX-10.73 12 EXHIBIT 10.73 1 EXHIBIT 10.73 HILTON NOTE APRIL 15, 1998 2 $2,666,666 Los Angeles, California April 15, 1998 FOR VALUE RECEIVED, The Sports Club Company, Inc., a Delaware corporation ("Maker"), promises to pay on or before the Due date (as defined below) to Hilton Hotels Corporation ("Noteholder") at 9336 Civic Center Drive, Beverly Hills, California 90210, or such other location as Noteholder may designate, the sum of $2,666,666, without any interest thereon, in accordance with the terms and conditions hereinafter set forth. The "Endorsed Date" of this Note, as that term is used herein, shall be the date on which Closing, as defined in that certain Asset Purchase Agreement, dated as of April 1, 1998, between Noteholder and The Sports Club Company, Inc. (the "Purchase Agreement"), shall occur. 1. PAYMENT OF PRINCIPLE AND INTEREST. 1.1 On the first anniversary of the Endorsed Date, Maker shall pay Noteholder principal in the sum of $1,333,333. 1.2 On the second anniversary of the Endorsed Date (the "Due Date"), Maker shall pay Noteholder principal in the sum of $1,333,333. 1.3 Principal and interest, if any, shall be payable in lawful money of the United States. Payments hereon shall be credited first to accrued and unpaid interest hereon, if any, and the balance to principal. 1.4 Upon failure of Maker to perform or to pay, in full, any monetary obligation of Maker under this Note within ten days after notice and demand therefor, then at the option of Noteholder, upon demand, the principal balance of this Note shall become immediately due and payable in full. 1.5 Should any sum due under this Note not be paid when due, said past-due sum shall thereafter bear simple interest at the rate of 10% per annum. 2. PREPAYMENT. 2.1 Notwithstanding any other provision in this Note, Maker shall have the right at any time or from time to time to prepay any or all of the unpaid principal balance of this Note, without penalty. If Maker prepays any portion of the unpaid principal balance of this Note, the balance of each installment of principal remaining to be paid after such prepayment will be reduced by a 0.833% (1/2 of 10%) monthly discount factor. For example, if the Endorsed Date were to be March 31, 1998 and the entire note were to be prepaid on October 1, 1998, the principal balance would be reduced by $237,405, from $2,666,666 to $2,429,261, calculated as follows: (i) $63,492 for the March 31,1999 payment = ($1,333,333-($1,333,333/(1 + (.0083 x 6)) plus (ii) $173,913 for the March 31, 2000 payment = ($1,333,333 -($1,333,333/(1 + (.0083 x 18)). - -------- -------- Initials Initials 3 2.2 Upon payment in full of the unpaid principal balance of this Note, this Note shall be canceled, and Noteholder shall mark this Note as "PAID IN FULL" and return this Note, as so marked, to the undersigned. 3. MISCELLANEOUS PROVISIONS. 3.1 NOTICES. All acknowledgments, notices, approvals, requests, responses, waivers and demands of any kind, which either party hereto may be required, or may desire, to serve upon the other party under the terms of, or in connection with, this Note or the Purchase Money Encumbrance, shall be given by personal delivery or by mailing a copy thereof, postage prepaid, by certified or registered mail, addressed as follows: TO NOTEHOLDER: 9366 Civic Center Drive Beverly Hills, California 90210 Attention: Chief Financial Officer and General Counsel TO MAKER: 11000 Santa Monica Boulevard Suite 300 Los Angeles, California 90025 Attention: Real Estate Department WITH A COPY TO: Resch Polster Alpert Berger LLP 10390 Santa Monica Boulevard Suite 400 Los Angeles, California 90025 Attention: Ronald M. Resch Notice shall be deemed given on the date of personal delivery or the second business day following the date of mailing. The above addresses or persons may be changed from time to time by notice served, as hereinabove provided by the party desiring a change, to the other party. 3.2 ATTORNEYS' FEES. In the event that legal action is taken by Maker or Noteholder in connection with this Note, or any related document or matter, the losing party in such legal action, in addition to such other damages as such losing party may e required to pay, shall pay reasonable attorneys' fees to the prevailing party. 3.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions and covenants contained herein shall inure to and be binding upon the successors, transferees, heirs and assigns of the parties hereto. 3.4 DEFAULT. Maker shall not be deemed to be in default of any of its obligations hereunder until the expiration of ten days after receipt of notice of default from Noteholder, and shall only be deemed to be in default thereafter if the subject default has not been cured within said ten-day period, or, if such default is a nonmonetary default and cannot be cured within such period, if Maker has not begun such cure within such period or thereafter ceases to diligently pursue its completion. 3.5 WAIVERS. Subject to paragraph 3.4, Maker and all endorsers hereof , if any, severally waive diligence and the right to plead any statute of limitations, presentment, grace, protest and demand, and also notice of protest, demand, dishonor and nonpayment of this Note, and notice of intention to accelerate the - -------- -------- Initials Initials 4 maturity date, and any and all moratorium, appraisement, exemption and homestead rights now provided or which may hereafter be provided by any federal or state statute both as to itself personally and as to all of its property, whether real or personal, against the enforcement and collection of the obligations evidenced by this Note and any and all extensions, renewals and modifications hereof. 3.6 SECTION HEADINGS. The headings of the sections of this Note are inserted solely for convenience, and are not intended to govern, limit or aid in the construction of any term or provision hereof. 3.7 CHOICE OF LAW. This Note shall be governed by the laws of the State of California. MAKER: THE SPORTS CLUB COMPANY, INC., a Delaware corporation By: /s/ John M. Gibbons -------------------------------------- Its: President --------------------------------- The undersigned Noteholder hereby acknowledges its agreement to the terms and conditions hereinabove set forth. NOTEHOLDER: Hilton Hotels Corporation, a Delaware corporation By /s/ Matt J. Hart -------------------------------------- Its EVP, CFO ----------------------------- The Endorsed Date is April 15 , 1998 - ------------- ------------- Initials Initials EX-10.74 13 EXHIBIT 10.74 1 EXHIBIT 10.74 HOUSTON ASSET PURCHASE AGREEMENT MARCH 5, 1998 2 INSTRUCTIONS FOR PURCHASE OF REAL ESTATE (Non-Residential) American Industrial Real Estate Association February 3, 1998 (Date for Reference Purposes) 1. BUYER. 1.1 THE SPORTS CLUB COMPANY, INC. (the "Buyer") hereby offers to purchase the real property, hereinafter described, from the owner thereof (the "Seller") (collectively, the "Parties" or individually, a "Party"), through an escrow (the "Escrow") to close on June 24, 1998 (the "Expected Closing Date") to be held by Texas State Title Company (the "Escrow Holder") whose address is ________________________________________________________________________________ Phone No. _________________ Facsimile No. _______________ upon the terms and conditions set forth in this agreement (the "Agreement"). Buyer shall have the right to assign Buyer's rights hereunder, but any such assignment shall not relieve Buyer of Buyer's obligations herein unless the Seller expressly releases Buyer. 1.2 The term "Date of Agreement as used herein shall be the date when by execution and delivery (as defined in paragraph 20.2) of this document or a subsequent counter-offer thereto, Buyer and Seller have reached agreement in writing whereby Seller agrees to sell, and Buyer agrees to purchase the Property upon terms accepted by both Parties. 2. PROPERTY. 2.1 The real property (the "Property") that is the subject of this offer consists of (insert a brief physical description) 3.5 acres of land improved with a retail nursery building and parking lot is located in the City of Houston, County of Harris, State of Texas, is commonly known by the street address of McQue Street and U.S. Route 59 and Interstate 610 and is legally described as: to be finished in escrow. 2.2 If the legal description of the Property is not complete or is inaccurate, this Agreement shall not be invalid and the legal description shall be completed or corrected to meet the requirements of Texas State Title Company (the "Title Company"), which Title Company shall issue the title policy hereinafter described. 2.3 The Property includes, at no additional cost to Buyer, the permanent improvements thereon, including those items which the law of the state in which the Property is located provides is part of the Property, as well as the following items, if any, owned by Seller and presently located in the Property: electrical distribution systems (power panels, buss ducting, conduits, disconnects, lighting fixtures), telephone distribution systems (lines, jacks and connections), space heaters, air conditioning equipment, air lines, fire sprinkler systems, security systems, carpets, window coverings, wall coverings, and n/a (collectively, the "Improvements"). 3. PURCHASE PRICE. 3.1 The purchase price (the "Purchase Price") to be paid by Buyer to Seller for the Property shall be $3,050,000 payable as follows: (a) Cash down payment, including the Deposit as defined in paragraph 4.3 (or if an all cash transaction, the Purchase Price): $ 250,000 ---------- Total Purchase Price: $3,050,000 ==========
3.2 If an Existing Deed of Trust permits the beneficiary thereof to require payment of a transfer fee as a condition to the transfer of the Property subject to such Existing Deed of Trust, Buyer agrees to pay transfer fees and costs of up to one and one-half percent (1 1/2%) of the unpaid principal balance of the applicable Existing Note. 4. DEPOSITS. 4.1 Buyer will deliver funds the sum of $250,000.00 payable to Texas State Title Company immediately upon mutual execution of this agreement, to be (check applicable box) [ ] forthwith deposited in the payees' trust account [ ] held uncashed until the Date of Agreement. When cashed, the check shall be deposited into the payee's trust account to be applied toward the Purchase Price of the Property at the Closing, as defined in paragraph 8.3. Should Buyer and Seller not enter into an agreement for purchase and sale, Buyer's check or funds shall, upon request by Buyer, be promptly returned to Buyer. 4.2 Subject to the satisfaction of all contingencies specified herein, Buyer shall deposit with Escrow Holder the additional sum of $ none to be applied to the Purchase Price at the Closing. 4.3 The funds deposited with Escrow Holder by or on behalf of Buyer under paragraphs 4.1 and 4.2 above (collectively the "Deposit"), shall be deposited by Escrow Holder in such State or Federally chartered bank as Buyer may select and in such interest-bearing account or accounts as Escrow Holder or Broker(s) deem appropriate and consistent with the timing requirements of this transaction. The interest therefrom shall accrue to the benefit of Buyer, who hereby acknowledges that there may be penalties or interest forfeitures if the applicable instrument is redeemed prior to its specified maturity. Buyer's Federal Tax Identification Number is 95-3519027 7. REAL ESTATE BROKERS. 7.1 The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the parties (check applicable boxes): [X] Riverstone Realty Advisors, L.L.P. represents the Seller exclusively ("SELLER'S BROKER") [X] The Weatherby Co . represents Buyer exclusively ("BUYER'S BROKER"); or [ ] represents both Seller and Buyer ("DUAL AGENCY"). (Also see Paragraph 26.) (the "Broker(s)"), all such named Broker(s) being the procuring cause(s) of this Agreement. See paragraph 26 for Disclosures Regarding the Nature of a Real Estate Agency Relationship. Buyer shall use the services of Buyer's Broker exclusively in connection with any and all negotiations and offers with respect to the property described in paragraph 2.1 for a period of one year from the date above. 7.2 Buyer and Seller each represent and warrant to the other that he/she/it has had no dealings with any person, firm, broker or finder in connection with the negotiation of this Agreement and/or the consummation of the purchase and sale contemplated herein, other than the Broker(s) named in paragraph 7.1, and no broker or other person, firm or entity, other than said Broker(s) is/are entitled to any commission or finder's fee in connection with this transaction as the result of any dealings or acts of such Party. Buyer and Seller do each hereby agree to indemnify, defend, protect and hold the other harmless from and against any costs, expenses or liability for compensation, commission or charges which may be claimed by any broker, finder or other similar party, other than said named Broker(s) by reason of any dealings or act of the Indemnifying Party. 8. ESCROW AND CLOSING. 8.1 Upon acceptance hereof by Seller, this Agreement, including any counter-offers incorporated herein by the Parties, shall constitute not only the agreement of purchase and sale between Buyer and Seller, but also instructions to Escrow Holder for the consummation of the Agreement through the Escrow. Escrow Holder shall not prepare any further escrow instructions restating or amending this Agreement unless specifically so instructed by the Parties of a Broker herein. 8.2 Escrow Holder is hereby authorized and instructed to conduct the Escrow in accordance with this Agreement, applicable law, custom and practice of the community in which Escrow Holder is located, including any reporting requirements of the Internal Revenue Code. In the event of a conflict between the law of the state where the Property is located and the law of the state where the Escrow Holder is located, the law of the state where the Property is located shall prevail. 8.3 Subject to satisfaction of the contingencies herein described, Escrow Holder shall close this escrow (the "Closing") by recording the grant deed and other documents required to be recorded and by disbursing the funds and documents in accordance with this Agreement. 8.4 If this transaction is terminated for non-satisfaction and non-waiver of a Buyer's Contingency, as defined in paragraph 9.4, then neither of the Parties shall thereafter have any liability to the other under this Agreement, except to the extent of the breach of any affirmative covenant or warranty in this Agreement that may have been involved. In the event of such termination, Buyer shall be promptly refunded all funds deposited by or on behalf of Buyer with a Broker, Escrow Holder or Seller, less only Title Company and Escrow Holder cancellation fees and costs, all of which shall be Buyer's obligation. 8.5 The Closing shall occur on the Expected Closing Date, or as soon thereafter as the escrow is in condition for Closing; provided, however, that if the Closing does not occur by the Expected Closing Date and the Expected Closing Date is not extended by mutual instructions of the Parties, a Party hereto not then in default under this Agreement may notify the other Party, Escrow Holder, and Broker(s), in writing that, unless the Closing occurs within five (5) business days following said notice, the Escrow and this Agreement shall be deemed terminated without further notice or instructions. - -------- -------- Initials Initials 3 8.6 Should the Closing not occur during said five (5) day period, this Agreement and Escrow shall be deemed terminated and Escrow Holder shall forthwith return all monies and documents, less only Escrow Holder's reasonable fees and expenses, to the Party who deposited them. Such Party shall indemnify and hold Escrow Holder harmless in connection with such return. However, no refunds or documents shall be returned to a party claimed by written notice to Escrow Holder to be in default under this Agreement. 8.7 Except as otherwise provided herein, the termination of Escrow and this Agreement and/or the return of deposited funds or documents shall not relieve or release either Buyer or Seller from any obligation to pay Escrow Holder's fees and costs or constitute a waiver, release or discharge of any breach or default that has occurred in the performance of the obligations, agreements, covenants or warranties contained herein. 8.8 If this Agreement terminates for any reason other than Seller's breach or default, then at Seller's request, and as a condition to the return of Buyer's deposit, Buyer shall within five (5) days after written request deliver to Seller, at no charge, copies of all surveys, engineering studies, soil reports, maps, master plans, feasibility studies and other similar items prepared by or for Buyer that pertain to the Property. 9. CONTINGENCIES TO CLOSING. 9.1 The Closing of this transaction is contingent upon the satisfaction or waiver of the following contingencies: (a) Disclosure. Buyer's receipt and written approval, within ten (10) days after delivery to Buyer, of a completed Property Information Sheet (the "Property Information Sheet"), concerning the Property, duly executed by or on behalf of Seller in the current form or equivalent to that published by the American Industrial Real Estate Association (the "A.I.R."). Seller shall provide Buyer with the Property Information Sheet within ten (10) days following the Date of Agreement. See also paragraph 2.5 for possible additional disclosure and contingency regarding a "Commercial Property Earthquake Weakness Disclosure Report." (b) Physical Inspection. Buyer's written approval, within ten (10) days following the later of the Date of Agreement or receipt by Buyer of the Property Information Sheet, of an inspection by Buyer, at Buyer's expense, of the physical aspects of the Property. (c) Hazardous Substance Conditions Report. Buyer's written approval, within One (1) day following the later of the Date of Agreement or receipt by Buyer of the Property Information Sheet, of a Hazardous Substance Conditions Report concerning the Property and relevant adjoining properties. Such report will be obtained at Buyer's direction and expense. A "Hazardous Substance" for purposes of this Agreement is defined as any substance whose nature and/or quantity of existence, use, manufacture, disposal or effect, render it subject to Federal, state or local regulation, Investigation, remediation or removal as potentially injurious to public health or welfare. A "Hazardous Substance Condition" for purposes of this Agreement is defined as the existence on, under or relevantly adjacent to the Property of a Hazardous Substance that would require remediation and/or removal under applicable Federal, state or local law. (d) Soil Inspection. Buyer's written approval, within One (1) day; after the later of the Date of Agreement or receipt by Buyer of the Property Information Sheet, of a soil test report concerning the Property. Said report shall be obtained at Buyer's direction and expense. Seller shall promptly provide to Buyer copies of any existing soils reports that Seller may have. (e) Governmental Approvals. Buyer's receipt, within fifteen (15) days of the Date of Agreement, of all approvals and permits from governmental agencies or departments which have or may have jurisdiction over the Property which Buyer deems necessary or desirable in connection with its intended use of the Property, including, but not limited to, permits and approvals required with respect to zoning, planning, building and safety, fire, police, handicapped access, transportation and environmental matters. Buyer's failure to deliver to Escrow Holder and Seller written notice terminating this Agreement prior to the expiration of said fifteen (15) day period as a result of Buyer's failure to obtain such approvals and permits shall be conclusively deemed to be Buyer's waiver of this condition to Buyer's obligations under this Agreement. (f) Condition of Title. Buyer's written approval of a current preliminary title report concerning the Property (the "PTR") issued by the Title Company, as well as all documents (the"Underlying Documents") referred to in the PTR, and the issuance by the Title Company of the title policy described in 10.1. Seller shall cause the PTR and all Underlying Documents to be delivered to Buyer promptly after the Date of Agreement. Buyer's approval is to be given within ten (10) days after receipt of said PTR and legible copies of all Underlying Documents. The disapproval by Buyer of any monetary encumbrance, which by the terms of this Agreement is not to remain against the Property after the Closing, shall not be considered a failure of this condition, as Seller shall have the obligation, at Seller's expense, to satisfy and remove such disapproved monetary encumbrance at or before the Closing. (g) Survey. Buyer's written approval, within One (1) day; after receipt of the PTR and Underlying Documents, of an ALTA title supplement based upon a survey prepared to American Land Title Association (the "ALTA") standards for an owner's policy by a licensed surveyor, showing the legal description and boundary lines of the Property, any easements of record, and any improvements, poles, structures and things located within ten (10) feet either side of the Property boundary lines. The survey shall be prepared at Buyer's direction and expense. If Buyer has obtained a survey and approved the ALTA title supplement, Buyer may elect within the period allowed for Buyer's approval of a survey to have an ALTA extended coverage owner's form of title policy, in which event Buyer shall pay any additional premium attributable thereto. (h) Existing Leases and Tenancy Statements. Buyer's written approval, within ten (10) days after receipt of legible copies of all leases, subleases or rental arrangements (collectively the "Existing Leases") affecting the Property, and a statement (the "Tenancy Statement") in the latest form or equivalent to that published by the A.I.R., executed by Seller and each tenant and subtenant of the Property. Seller shall use its best efforts to provide Buyer with said Existing Leases and Tenancy Statements promptly after the Date of Agreement. (i) Other Agreements. Buyer's written approval, within ten (10) days after receipt, of a copy of any other agreements ("Other Agreements") known to Seller that will affect the Property beyond the Closing. Seller shall cause said copies to be delivered to Buyer promptly after the Date of Agreement. (j) Financing. If paragraph 5 hereof dealing with a financing contingency has not been stricken, the satisfaction or waiver of such New Loan contingency. (k) Existing Notes. If paragraph 3.1(c) has not been stricken, Buyer's written approval, within ten (10) days after receipt, of conformed and legible copies of the Existing Notes, Existing Deeds of Trust and related agreements (collectively the "Loan Documents") to which the Property will remain subject after the Closing, including a beneficiary statement (the "Beneficiary Statement") executed by the holders of the Existing Notes confirming: (1) the amount of the unpaid principal balance, the current interest rate, and the date to which interest is paid, and (2) the nature and amount of any impounds held by the beneficiary in connection with said loan. Seller shall use its best efforts to provide Buyer with said Loan Documents and Beneficiary Statement promptly after the Date of Agreement. Buyer's obligation to close is further conditioned upon Buyer's being able to purchase the Property without acceleration or change in the terms of any Existing Notes or charges to Buyer except as otherwise provided in this Agreement or approved by Buyer, provided, however, Buyer shall pay the transfer fee referred to in paragraph 3.2 hereof. (l) Destruction, Damage or Loss. There shall not have occurred prior to the Closing, a destruction of, or damage or loss to, the Property or any portion thereof, from any cause whatsoever, which would cost more than $10,000.00 to repair or cure. If the cost of repair or cure is $10,000.00 or less, Seller shall repair or cure the loss prior to the Closing. Buyer shall have the option, within ten (10) days after receipt of written notice of a loss costing more than $10,000.00 to repair or cure, to either terminate this transaction or to purchase the Property notwithstanding such loss, but without deduction or offset against the Purchase Price. If the cost to repair or cure is more than $10,000.00, and Buyer does not elect to terminate this transaction, Buyer shall be entitled to any insurance proceeds applicable to such loss. Unless otherwise notified in writing by either Party or Broker, Escrow Holder shall assume no destruction, damage or loss costing more than $10,000.00 to repair or cure has occurred prior to Closing. (m) Material Change. No Material Change, as hereinafter defined, shall have occurred with respect to the Property that has not been approved in writing by Buyer. For purposes of this Agreement, a "Material Change" shall be a change in the status of the use, occupancy, tenants, or condition of the Property as reasonably expected by the Buyer, that occurs after the date of this offer and prior to the Closing. Buyer shall have ten (10) days following receipt of written notice from any source of any such Material Change within which to approve or disapprove same. Unless otherwise notified in writing by either Party or Broker, Escrow Holder shall assume that no Material Change has occurred prior to the Closing. (n) Seller Performance. The delivery of all documents and the due performance by Seller of each and every undertaking and agreement to be performed by Seller under this Agreement. (o) Breach of Warranty. That each representation and warranty of Seller herein be true and correct as of the Closing. Escrow Holder shall assume that this condition has been satisfied unless notified to the contrary in writing by Buyer or Broker(s) prior to the Closing. (p) Broker's Fee. Payment at the Closing of such Broker's Fee as is specified in this Agreement or later written instructions to Escrow Holder executed by Seller and Broker(s). It is agreed by Buyer, Seller and Escrow Holder that Broker(s) is/are a third party beneficiary of this Agreement insofar as the Broker's fee is concerned, and that no change shall be made by Buyer. Seller or Escrow Holder with respect to the time of payment, amount of payment, or the conditions to payment of the Broker's fee specified in this Agreement, without the written consent of Broker(s). 9.2 All of the contingencies specified in sub-paragraphs (a) through (o) of paragraph 9.1 are for the benefit of, and may be waived by, Buyer, and may be elsewhere herein referred to as "Buyer Contingencies." 9.3 If Buyer shall fail, within the applicable time specified, to approve or disapprove in writing to Escrow Holder, Seller and the other Party's Broker, any item, matter or document subject to Buyer's approval under the terms of this Agreement, it shall be conclusively presumed that Buyer has approved such item, matter or document. Buyer's conditional approval shall constitute a disapproval, unless provision is made by the Seller within the time specified therefor by the Buyer in the conditional approval or by this Agreement, whichever is later, for the satisfaction of the condition imposed by the Buyer. 9.4 If any Buyer's Contingency is not satisfied or if Buyer disapproves any matter subject to its approval within the time period applicable thereto ("Disapproved Item"), Seller shall have the right within ten (10) days following the expiration of the time period applicable to such Buyer Contingency or receipt of notice of Buyer's disapproval, as the case may be, to elect to cure such Disapproved Item prior to the Expected Closing Date ("Seller's Election"). Seller's failure to give to Buyer within said ten (10) day period, written notice of Seller's commitment to cure such Disapproved Item on or before the Expected Closing Date shall be conclusively presumed to be Seller's Election not to cure such Disapproved Item. If Seller elects, either by written notice or failure to give written notice, not to cure a Disapproved Item, Buyer shall have the election, within ten (10) days after Seller's Election to either accept title to the Property subject to that Disapproved Item, or to terminate this transaction. Buyer's failure to elect termination by written notice to Seller within said ten (10) days period shall constitute Buyer's election to accept title to the Property subject to that Disapproved Item without deduction or offset. Unless expressly provided otherwise herein, Seller's right to cure shall not apply to Hazardous Substance Conditions referenced in paragraph 9.1(c) or to the Financing Contingency set forth in paragraph 5. Unless the parties mutually instruct otherwise, if the time periods for the satisfaction of contingencies or for Seller's and Buyer's said Elections would expire on a date after the Expected Closing Date, the Expected Closing Date shall be deemed extended to coincide with the expiration of three (3) business days following the expiration of: (a) the applicable contingency period(s), (b) the period within which the Seller may elect to cure the Disapproved Item, or (c) if Seller elects not to cure, the period within which Buyer may elect to terminate this transaction, whichever is later. 9.5 Buyer understands and agrees that until such time as all Buyer's Contingencies have been satisfied or waived, Seller and/or its agents may solicit, entertain and/or accept back-up offers to purchase the subject Property in the event the transaction covered by this Agreement is not consummated. - -------- -------- Initials Initials 4 9.6 As defined in subparagraph 9.1(c), Buyer and Seller acknowledge that extensive local, state and Federal legislation establish broad liability upon owners and/or users of real property for the investigation and remediation of a Hazardous Substance Condition. The determination of the existence of a Hazardous Substance Condition and the evaluation of the impact of such a condition are highly technical and beyond the expertise of Broker(s). Buyer and Seller acknowledge that they have been advised by Broker(s) to consult their own technical and legal experts with respect to the possible Hazardous Substance Condition aspects of this Property or adjoining properties, and Buyer and Seller are not relying upon any investigation by or statement of Broker(s) with respect thereto. Buyer and Seller hereby assume all responsibility for the impact of such Hazardous Substance Conditions upon their respective interests herein. 10. DOCUMENTS REQUIRED AT CLOSING: 10.1 Escrow Holder shall cause to be issued to Buyer a standard coverage (or ALTA extended, if so elected under paragraph 9.1(f)) owner's form policy of title insurance effective as of the Closing, issued by the Title Company in the full amount of the Purchase Price, insuring title to the Property vested in Buyer, subject only to the exceptions approved by Buyer. In the event there is a Purchase Money Deed of Trust in this transaction, the policy of title insurance shall be a joint protection policy insuring both Buyer and Seller. "IMPORTANT: IN A PURCHASE OR EXCHANGE OF REAL PROPERTY, IT MAY BE ADVISABLE TO OBTAIN TITLE INSURANCE IN CONNECTION WITH THE CLOSE OF ESCROW SINCE THERE MAY BE PRIOR RECORDED LIENS AND ENCUMBRANCES WHICH AFFECT YOUR INTEREST IN THE PROPERTY BEING ACQUIRED. A NEW POLICY OF TITLE INSURANCE SHOULD BE OBTAINED IN ORDER TO ENSURE YOUR INTEREST IN THE PROPERTY THAT YOU ARE ACQUIRING." 10.2 Seller shall deliver or cause to be delivered to Escrow Holder in time for delivery to Buyer at the Closing, an original ink signed: (a) Grant deed (or equivalent), duly executed and in recordable form, conveying fee title to the Property to Buyer. (b) If paragraph 3.1(c) has not been stricken, the Beneficiary Statements concerning Existing Note(s). (c) if applicable, the Existing Leases and Other Agreements together with duly executed assignments thereof by Seller and Buyer. The assignment of Existing Leases shall be on the most recent Assignment and Assumption of Lessor's interest in Lease form published by the A.I.R. or its equivalent. (d) If applicable, the Tenancy Statements executed by Seller and the Tenant(s) of the Property. (e) An affidavit executed by Seller to the effect that Seller is not a "foreign person" within the meaning of Internal Revenue Code Section 1445 or successor statutes. If Seller does not provide such affidavit in form reasonably satisfactory to Buyer at least three (3) business days prior to the Closing, Escrow Holder shall at the Closing deduct from Seller's proceeds and remit to Internal Revenue Service such sum as is required by applicable Federal law with respect to purchases from foreign sellers. 10.3 Buyer shall deliver or cause to be delivered to Seller through escrow: (a) The cash portion of the Purchase Price and such additional sums as are required of Buyer under this Agreement for prorations, expenses and adjustments. The balance of the cash portion of the Purchase Price, including Buyer's escrow charges and other cash charges, if any, shall be deposited by Buyer with Escrow Holder, by cashier's check drawn upon a local major banking institution, federal funds wire transfer, or any other method acceptable to Escrow Holder as immediately collectable funds, no later than 11:00 o'clock A.M. on the business day prior to the Expected Closing Date. (b) If a Purchase Money Note and Purchase Money Deed of Trust are called for by this Agreement, the duly executed originals of those documents, the Purchase Money Deed of Trust being in recordable form, together with evidence of fire insurance on the improvements in the amount of the full replacement cost naming Seller as a mortgage loss payee, and a real estate tax service contract (at Buyer's expense), assuring Seller of notice of the status of payment of real property taxes during the life of the Purchase Money Note. (c) The assumption portion of the Assignment and Assumption of Lessor's Interest in Lease form specified in paragraph 10.2(c), above, duly executed by Buyer with respect to the obligations of the Lessor accruing after the Closing as to each Existing Lease. (d) Assumptions duly executed by Buyer of the obligations of Seller that accrue after Closing under any Other Agreements. (e) If applicable, a written assumption duly executed by Buyer of the loan documents with respect to Existing Notes. 11. PRORATIONS, EXPENSES AND ADJUSTMENTS. 11.1 Taxes. Real property taxes payable by the owner of the Property shall be prorated through Escrow as of the date of the Closing, based upon the latest tax bill available. The Parties agree to prorate as of the Closing any taxes assessed against the Property by supplement bill levied by reason of events occurring prior to the Closing. Payment shall be made promptly in cash upon receipt of a copy of any such supplement bill of the amount necessary to accomplish such proration. Seller shall pay and discharge in full at or before the Closing the unpaid balance of any special assessment bonds, necessary to accomplish such proration. Seller shall pay and discharge in full at or before the Closing the unpaid balance of any special assessment bonds. 11.2 Insurance. If Buyer elects to take an assignment of the existing casualty and/or liability insurance that is maintained by Seller, the current premium therefor shall be prorated through Escrow as of the date of Closing. 11.3 Rentals, Interest and Expenses. Collected rentals, interest on Existing Notes, utilities and operating expenses shall be prorated as of the date of Closing. The Parties agree to promptly adjust between themselves outside of Escrow any rents received after the Closing. 11.4 Security Deposit. Security Deposits held by Seller shall be given to Buyer by a credit to the cash required of Buyer at the Closing. 11.5 Post Closing Matters. Any item to be prorated that is not determined or determinable at the Closing shall be promptly adjusted by the Parties by appropriate cash payment outside of the Escrow when the amount due is determined. 11.6 Escrow Costs and Fees. Buyer and Seller shall each pay one-half of the Escrow Holder's charges and Seller shall pay the usual recording fees and any required documentary transfer taxes. Seller shall pay the premium for a standard coverage owner's or joint protection policy of title insurance. 12. REPRESENTATION AND WARRANTIES OF SELLER AND DISCLAIMER. 12.1 Seller's warranties and representations shall survive the Closing and delivery of the deed, and, unless otherwise noted herein, are true, material and relied upon by Buyer and Broker(s) in all respects, both as of the Date of Agreement, and as of the date of Closing. Seller hereby make the following warranties and representations to Buyer and Broker(s): (a) Authority of Seller. Seller is the owner of the Property and/or has the full right, power and authority to sell, convey and transfer the Property to Buyer as provided herein, and to perform Seller's obligations hereunder. (b) Maintenance During Escrow and Equipment Condition At Closing. EXCEPT as otherwise provided in paragraph 9.1(i) hereof dealing with destruction, damage or loss, Seller shall maintain the Property until the Closing in its present condition, ordinary wear and tear excepted. The heating, ventilating, air conditioning, plumbing, elevators, loading doors and electrical systems shall be in good operating order and condition at the time of Closing. (c) Hazardous Substances/Storage Tanks. Seller has no knowledge, except as otherwise disclosed to Buyer in writing, of the existence or prior existence on the Property of any Hazardous Substance (as defined in paragraph 9.1(c)), nor of the existence or prior existence of any above or below ground storage tank or tanks. (d) Compliance. Seller has no knowledge of any aspect or condition of the Property which violates applicable laws, rules, regulations, codes, or covenants, conditions or restrictions, or of improvements or alterations made to the Property without a permit where one was required, or of any unfulfilled order or directive of any applicable governmental agency or casualty insurance company that any work of investigation, remediation, repair, maintenance or improvement is to be performed on the Property. (e) Changes in Agreements. Prior to the Closing, Seller will not violate or modify, orally or in writing, any Existing Lease or Other Agreement, or create any new leases or other agreements affecting the Property, without Buyer's written approval, which approval will not be unreasonably withheld. (f) Possessory Rights. Seller has no knowledge that anyone will, at the Closing, have any right to possession of the Property, except as disclosed by this Agreement or otherwise in writing to Buyer. (g) Mechanics' Liens. There are no unsatisfied mechanic's or materialman's lien rights concerning the Property. (h) Actions, Suits or Proceedings. Seller has no knowledge of any actions, suits or proceedings pending or threatened before any commission, board, bureau, agency, instrumentally, arbitrator(s) court or tribunal that would affect the Property or the right to occupy or utilize same. (i) Notice of Changes. Seller will promptly notify Buyer and Broker(s) in writing of any Material Change (as defined in paragraph 9.1(m)) affecting the Property that becomes known to Seller prior to the Closing. (j) No Tenant Bankruptcy Proceedings. Seller has no notice or knowledge that any tenant of the Property is the subject of a bankruptcy or insolvency proceeding. (k) No Seller Bankruptcy Proceedings. Seller is not the subject of a bankruptcy, insolvency or probate proceeding. 12.2 Buyer hereby acknowledges that, except as otherwise stated in this Agreement, Buyer is purchasing the Property in its existing condition and will, by the time called for herein, make or have waived all inspections of the Property Buyer believes are necessary to protect its own interest in, and its contemplated use of, the Property. The Parties acknowledge that, except as otherwise stated in this Agreement, no representations, inducements, promises, agreements, assurances, oral or written, concerning the Property, or any aspect of the Occupational Safety and Health Act, hazardous substance laws, or any other act, ordinance or law, have been made by either Party or Broker, or relied upon by either Party hereto. 13. POSSESSION. 13.1 Possession of the Property shall be given to Buyer at the Closing subject to the rights of tenants under Existing Leases. 14. BUYER'S ENTRY. - -------- -------- Initials Initials 5 14.1 At any time during the Escrow period, Buyer, and its agents and representatives, shall have the right at reasonable times and subject to rights of tenants under Existing Leases, to enter upon the Property for the purpose of making inspections and tests specified in this Agreement. Following any such entry or work, unless otherwise directed in writing by Seller, Buyer shall return the Property to the condition it was in prior to such entry or work, including the recompaction or removal of any disrupted soil or material as Seller may reasonably direct. All such inspections and tests and any other work conducted or materials furnished with respect to the Property by or for Buyer shall be paid for by Buyer as and when due and Buyer shall indemnify, defend, protect and hold harmless Seller and the Property of and from any and all claims, liabilities, demands, losses, costs, expenses (including reasonable attorney's fees), damages or recoveries, including those for injury to person or property, arising out of or relating to any such work or materials or the acts or omissions of Buyer, its agents or employees in connection therewith. 15. FURTHER DOCUMENTS AND ASSURANCES. 15.1 Buyer and Seller shall each, diligently and in good faith, undertake all actions and procedures reasonably required to place the Escrow in condition for Closing as and when required by this Agreement. Buyer and Seller agree to provide all further information, and to execute and deliver all further documents and instruments, reasonably required by Escrow Holder or the Title Company. 16. ATTORNEYS' FEES. 16.1 In the event of any litigation or arbitration between the Buyer, Seller, and Broker(s), or any of them, concerning this transaction, the prevailing party shall be entitled to reasonable attorney's fees and costs. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred in good faith. 17. PRIOR AGREEMENTS/AMENDMENTS. 17.1 The contract in effect as of the Date of Agreement supersedes any and all prior agreements between Seller and Buyer regarding the Property. 17.2 Amendments to this Agreement are effective only if made in writing and executed by Buyer and Seller. 18. BROKER'S RIGHTS. 18.1 If this sale shall not be consummated due to the default of either the Buyer or Seller, the defaulting party shall be liable to and shall pay to Broker(s) the commission that Broker(s) would have received had the sale been consummated. This obligation of Buyer, if Buyer is the defaulting party, is in addition to any obligation with respect to liquidated damages. 18.2 Upon the Closing. Broker(s) is/are authorized to publicize the facts of this transaction. 19. NOTICES. 19.1 Whenever any Party hereto, Escrow Holder or Broker(s) herein shall desire to give or serve any notice, demand, request, approval or other communication, each such communication shall be in writing and shall be delivered personally, by messenger or by mail, postage prepaid, addressed as set forth adjacent to that party's or Broker's signature on this Agreement or by telecopy with receipt confirmed by telephone. Service of any such communication shall be deemed made on the date of actual receipt at such address. 19.2 Any Party or Broker hereto may from time to time, by notice in writing served upon the other Party as aforesaid, designate a different address to which, or a different person or additional persons to whom, all communications are thereafter to be made. 20. DURATION OF OFFER. 20.1 If this offer shall not be accepted by Seller on or before 5:00 p.m. according to the time standard applicable to the city of Los Angeles, CA on the date of February 20, 1998, it shall be deemed automatically revoked. 20.2 The acceptance of this offer, or of any subsequent counter-offer hereto, that creates an agreement between the Parties as described in paragraph 1.2, shall be deemed made upon delivery to the other Party or either Broker herein of a duly executed writing unconditionally accepting the last outstanding offer or counter-offer. 21. LIQUIDATED DAMAGES. (This Liquidated Damages paragraph is applicable only if initialled by both parties.) 21.1 THE PARTIES AGREE THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX, PRIOR TO SIGNING THIS AGREEMENT, THE ACTUAL DAMAGES WHICH WOULD BE SUFFERED BY SELLER IF BUYER FAILS TO PERFORM ITS OBLIGATIONS UNDER THIS AGREEMENT. THEREFORE, IF, AFTER THE SATISFACTION OR WAIVER OF ALL CONTINGENCIES PROVIDED FOR THE BUYER'S BENEFIT, BUYER BREACHES THIS AGREEMENT, SELLER SHALL BE ENTITLED TO LIQUIDATED DAMAGES IN THE AMOUNT OF $250,000 PLUS INTEREST, IF ANY, ACCRUED THEREON. UPON PAYMENT OF SAID SUM TO SELLER, BUYER SHALL BE RELEASED FROM ANY FURTHER LIABILITY TO SELLER, AND ANY ESCROW CANCELLATION FEES AND TITLE COMPANY CHARGES SHALL BE PAID BY SELLER. -------------------------- ----------------------------- BUYER INITIALS SELLER INITIALS 22. ARBITRATION OF DISPUTES. (This Arbitration of Disputes paragraph is applicable only if initiated by both parties and is subject to paragraph 23, below.) 22.1 ANY CONTROVERSY AS TO WHETHER SELLER IS ENTITLED TO THE LIQUIDATED DAMAGES AND/OR BUYER IS ENTITLED TO THE RETURN OF DEPOSIT MONEY, SHALL BE DETERMINED BY BINDING ARBITRATION BY, AND UNDER THE COMMERCIAL RULES (the "COMMERCIAL RULES") OF, THE AMERICAN ARBITRATION ASSOCIATION. HEARINGS ON SUCH ARBITRATION SHALL BE HELD IN THE COUNTY WHERE THE PROPERTY IS LOCATED. ANY SUCH CONTROVERSY SHALL BE ARBITRATED BY THREE (3) ARBITRATORS WHO SHALL BE IMPARTIAL REAL ESTATE BROKERS WITH AT LEAST FIVE (5) FULL TIME YEARS OF EXPERIENCE IN THE AREA WHERE THE PROPERTY IS LOCATED, IN THE TYPE OF REAL ESTATE THAT IS THE SUBJECT OF THIS AGREEMENT AND SHALL BE APPOINTED UNDER THE COMMERCIAL RULES. THE ARBITRATORS SHALL HEAR AND DETERMINE SAID CONTROVERSY IN ACCORDANCE WITH APPLICABLE LAW AND THE INTENTION OF THE PARTIES AS EXPRESSED IN THIS AGREEMENT, AS THE SAME MAY HAVE BEEN DULY MODIFIED IN WRITING BY THE PARTIES PRIOR TO THE ARBITRATION. UPON THE EVIDENCE PRODUCED AT AN ARBITRATION HEARING SCHEDULED AT THE REQUEST OF EITHER PARTY, SUCH PRE-ARBITRATION DISCOVERY SHALL BE PERMITTED AS IS AUTHORIZED UNDER THE COMMERCIAL RULES OR STATE LAW APPLICABLE TO ARBITRATION PROCEEDINGS. THE AWARD SHALL BE EXECUTED AT LEAST TWO (2) OF THE THREE (3) ARBITRATORS, BE RENDERED WITHIN PARTY THIRTY (30) DAYS AFTER THE CONCLUSION OF THE HEARING, AND MAY INCLUDE ATTORNEYS' FEES AND COSTS TO THE PREVAILING PARTY PER PARAGRAPH 16 HEREOF. JUDGMENT MAY BE ENTERED ON THE AWARD IN ANY COURT OF COMPETENT JURISDICTION NOTWITHSTANDING THE FAILURE OF A PARTY DULY NOTIFIED OF THE ARBITRATION HEARING TO APPEAR THEREAT. 22.2 BUYER'S RESORT TO OR PARTICIPATION IN SUCH ARBITRATION PROCEEDINGS SHALL NOT BAR SUIT IN A COURT OF COMPETENT JURISDICTION BY THE BUYER FOR DAMAGES AND/OR SPECIFIC PERFORMANCE UNLESS AND UNTIL THE ARBITRATION RESULTS IN AN AWARD TO THE SELLER OF LIQUIDATION DAMAGES, IN WHICH EVENT SUCH AWARD SHALL ACT AS A BAR AGAINST ANY ACTION BY BUYER FOR DAMAGES AND/OR SPECIFIC PERFORMANCE. 22.3 NOTICE: BY INITIALLING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION. YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. XXX - -------- -------- Initials Initials 6 WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION. -------------------------- ----------------------------- BUYER INITIALS SELLER INITIALS 23. APPLICABLE LAW. 23.1 This Agreement shall be governed by, and paragraph 22.3 amended to refer to, the laws of the state in which the Property is located. 24. TIME OF ESSENCE. 24.1 Time is of the essence of this Agreement. 25. COUNTERPARTS. 25.1 This Agreement may be executed by Buyer and Seller in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Escrow Holder, after verifying that the counterparts are identical except for the signatures, is authorized and instructed to combine the signed signature pages on one of the counterparts, which shall then constitute the Agreement. 26. DISCLOSURES REGARDING THE NATURE OF A REAL ESTATE AGENCY RELATIONSHIP. 26.1 The Parties and Broker(s) agree that their relationship(s) shall be governed by the principles set forth in California Civil Code, Section 2375, as summarized in the following paragraph 26.2. 26.2 When entering into a discussion with a real estate agent regarding a real estate transaction, a Buyer or Seller should from the outset understand what type of agency relationship or representation it has with the agent in the transaction. Buyer and Seller acknowledge being advised by the Broker(s) in this transaction, as follows: (a) Seller's Agent. A Seller's agent under a listing agreement with the Seller acts as the agent for the Seller only. A Seller's agent or subagent has the following affirmative obligations: (1) To the Seller. A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Seller. (2) To the Buyer and the Seller: a. Diligent exercise of reasonable skill and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. a duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other Party which does not involve the affirmative duties set forth above. (b) Buyer's Agent. A selling agent can, with a Buyer's consent, agree to act as agent for the Buyer only. In these situations, the agent is not the Seller's agent, even if by agreement the agent may receive compensation for services rendered, either in full or in part from the Seller. An agent acting only for a Buyer has the following affirmative obligations. (1) To the Buyer: A fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the Buyer. (2) To the Buyer and the Seller: a. diligent exercise of reasonable skill and care in performance of the agent's duties. b. A duty of honest and fair dealing and good faith. c. A duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidential information obtained from the other party which does not involve the affirmative duties set forth above. (c) Agent Representing Both Seller and Buyer. A real estate agent, either acting directly or through one ore more associate licenses, can legally be the agent of both the Seller and the Buyer in a transaction, but only with the knowledge and consent of both the Seller and the Buyer. (1) In a dual agency situation, the agent has the following affirmative obligations to both the Seller and the Buyer: a. A fiduciary duly of utmost care, integrity, honesty and loyalty in the dealings with either Seller or the Buyer. b. Other duties to the Seller and the Buyer as stated above in their respective sections (a) or (b) of this paragraph 26.2. (2) In representing both Seller and Buyer, the agent may not without the express permission of the respective Party, disclose to the other Party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered. (3) The above duties of the agent in a real estate transaction do not relieve a Seller or Buyer from the responsibility to protect their own interests. Buyer and Seller should carefully read all agreements to assure that they adequately express their understanding of the transaction. A real estate agent is a person qualified to advise about real estate. If legal or tax advise is desired, consult a competent professional. (d) Further Disclosures. Throughout this transaction Buyer and Seller may receive more than one disclosure, depending upon the number of agents assisting in the transaction. Buyer and Seller should each read its contents each time it is presented, considering the relationship between them and the real estate agent in this transaction and that disclosure. 26.3 Confidential Information: Buyer and Seller agree to identify to Broker(s) as "Confidential" any communication or information given Broker(s) that is considered by such Party to be confidential. 27. ADDITIONAL PROVISIONS: Additional provisions of this offer, if any, are as follows or are attached hereto by an addendum consisting of paragraphs ______ through ______. (It will be presumed no other provisions are included unless specified here.) SEE ADDENDUM - -------- -------- Initials Initials 7 BUYER AND SELLER HEREBY ACKNOWLEDGE THAT THEY HAVE BEEN AND ARE NOW ADVISED BY THE BROKER(S) TO CONSULT AND RETAIN THEIR OWN EXPERTS TO ADVISE AND REPRESENT THEM CONCERNING THE LEGAL AND INCOME TAX EFFECTS OF THIS AGREEMENT, AS WELL AS THE CONDITION AND/OR LEGALITY OF THE PROPERTY, THE IMPROVEMENTS AND EQUIPMENT THEREIN, THE SOIL THEREOF, THE CONDITION OF TITLE THERETO, THE SURVEY THEREOF, THE ENVIRONMENTAL ASPECTS THEREOF, THE INTENDED AND/OR PERMITTED USAGE THEREOF, THE EXISTENCE AND NATURE OF TENANCIES THEREIN, THE OUTSTANDING OTHER AGREEMENTS, IF ANY, WITH RESPECT THERETO, AND THE EXISTING OR CONTEMPLATED FINANCING THEREOF, AND THAT THE BROKER(S) IS/ARE NOT TO BE RESPONSIBLE FOR PURSUING THE INVESTIGATION OF ANY SUCH MATTERS UNLESS EXPRESSLY OTHERWISE AGREED TO IN WRITING BY BROKER(S) AND BUYER OR SELLER. THIS FORM IS NOT FOR USE IN CONNECTION WITH THE SALE OF RESIDENTIAL PROPERTY. IF THIS AGREEMENT HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS AGREEMENT OR THE TRANSACTION INVOLVED HEREIN. THE UNDERSIGNED BUYER OFFERS AND AGREES TO BUY THE PROPERTY ON THE TERMS AND CONDITIONS STATED AND ACKNOWLEDGES RECEIPT OF A COPY HEREOF. BROKER: BUYER: The Weatherby Co. THE SPORTS CLUB COMPANY, INC. - ---------------------------------------- ------------------------------------ By /s/ W. J. Weatherby Date 3/5/98 By /s/ Mark Spino Date 3/5/98 - ---------------------------------------- ------------------------------------ Name Printed: W. J. Weatherby Name Printed: Mark Spino - ---------------------------------------- ------------------------------------ Title: Owner Title: Vice President - ---------------------------------------- ------------------------------------ 11100 Santa Monica Blvd., No. 300 11100 Santa Monica Blvd., No. 300 - ---------------------------------------- ------------------------------------ Address Address Los Angeles, CA 90025 Los Angeles, CA 90025 - ---------------------------------------- ------------------------------------ (310) 479-5200 (310) 479-8879 (310) 470-5200 (310) 479-8879 - ---------------------------------------- ------------------------------------ Telephone Facsimile No. Telephone Facsimile No. 28. ACCEPTANCE. 28.1 Seller accepts the foregoing offer to purchase the Property and hereby agrees to sell the Property to Buyer on the terms and conditions therein specified. 28.2 Seller acknowledges that Broker(s) has/have been related to locate a Buyer and is/are the procuring cause of the purchase and sale of the Property set forth in this Agreement. In consideration of real estate brokerage service rendered by Broker(s). Seller agrees to pay Broker(s) a real estate brokerage fee in a sum equal to ____% of the Purchase Price (the "Broker(s) Fee") divided equally in such shares as said Broker(s) shall direct in writing. As is provided in paragraph 9.1(p), this Agreement shall serve as an irrevocable instruction to Escrow Holder to pay such brokerage fee to Broker(s) out of the proceeds accruing to the account of Seller at the Closing. 28.3 Seller acknowledges receipt of a copy hereof and authorizes the Broker(s) to deliver a signed copy to Buyer. NOTE: A PROPERTY INFORMATION SHEET IS REQUIRED TO BE DELIVERED TO BUYER BY SELLER UNDER THIS AGREEMENT. BROKER: SELLER RIVERSTONE REALTY ADVISORS, LLC /s/ Peter Appel - ---------------------------------------- ------------------------------------ By Date By /s/ Peter Appel Date Name Printed: Name Printed: Peter Appel - ---------------------------------------- ------------------------------------ Title: Title: Manager - ---------------------------------------- ------------------------------------ 343 West Manhattan Avenue - ---------------------------------------- ------------------------------------ Address Address Santa Fe, New Mexico 87501 (505) 988-2700 (505) 988-2793 - ---------------------------------------- ------------------------------------ Telephone Facsimile No. Telephone Facsimile No. THESE FORMS ARE OFTEN MODIFIED TO MEET CHANGING REQUIREMENTS OF LAW AND NEEDS OF THE INDUSTRY. ALWAYS WRITE OR CALL TO MAKE SURE YOU ARE UTILIZING THE MOST CURRENT FORM: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 SOUTH FLOWER STREET, SUITE 600, LOS ANGELES, CA 90017. (213) 687-8777. (C) COPYRIGHT 1989-BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION. ALL RIGHTS RESERVED. NO PART OF THESE WORKS MAY BE REPRODUCED IN ANY FORM WITHOUT PERMISSION IN WRITING. FORM 729-R-3-1/94 EX-10.75 14 EXHIBIT 10.75 1 EXHIBIT 10.75 AMENDMENT TO SOP JUNE 2, 1998 2 THE SPORTS CLUB COMPANY, INC. 1994 STOCK INCENTIVE PLAN (AS AMENDED AND RESTATED JUNE 2, 1998) ARTICLE 1 GENERAL PURPOSE OF PLAN The name of this plan is The Sports Club Company, Inc. 1994 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable The Sports Club Company, Inc. (the "Company") and any Parent or any Subsidiary to obtain and retain the services of the types of employees, consultants, officers and directors who will contribute to the Company's long range success and to provide incentives which 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 Directors 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). "Date of Grant" means the date on which the Administrator adopts a resolution expressly granting a Right to a Participant. "Director" means a member of the Board. "Disability" means permanent and total disability as defined by the Administrator. "Eligible Person" means an employee or officer or any consultant or Director of the Company, any Parent or any Subsidiary, other than the Administrator. "Fair Market Value" per share at any date shall mean (i) if the Stock is listed on an exchange or exchanges, or admitted for trading in the Nasdaq National Market ("National Market"), the last reported sales price per share on the last business day prior to such date on the principal exchange on which it is traded, or on the National Market, as applicable, or if no sale was made on such day on such principal exchange or on the National Market, as applicable, the last reported sales price per share on the most recent day prior to such date on which a sale was reported on such exchange or the National Market, as applicable; or (ii) if the Common Stock is not then traded on an exchange or in the National Market, the average of the closing bid and asked prices per share for the Common Stock in the over-the-counter market as quoted on NASDAQ on the day prior to such date; or (iii) if the Common Stock is not listed on an exchange or quoted on NASDAQ, an amount determined in good faith by the Administrator. 3 "Grantee" means an Eligible Participant who is granted a SAR pursuant to the Plan. "Incentive Stock Option" means a Stock Option intended to qualify as an "incentive stock option" as that term is defined in Section 422 of the Code. "Non-Statutory Option" means a Stock Option not intended to qualify as an Incentive Stock Option. "Offeree" means an Eligible Participant who is granted a Purchase Right pursuant to the Plan. "Optionee" means an Eligible Participant who is granted a Stock Option pursuant to the Plan. "Parent" means any present or future corporation which would be a "parent corporation" as that term is defined in Section 424 of the Code. "Participant" means any Eligible Person selected by the Administrator, pursuant to the Administrator's authority in Article 3, to receive grants of Rights. "Plan" means The Sports Club Company, Inc. 1994 Stock Incentive Plan, as the same may be amended or supplemented from time to time. "Purchase Right" means the right to purchase Stock granted pursuant to Article 8. "Rights" means Stock Options, Purchase Rights and SARs. "Retirement" means retirement from active employment with the Company or any Parent or Subsidiary as defined by the Administrator. "SAR" means a stock appreciation right granted alone or in tandem with a Stock Option pursuant to Article 7. "Special Terminating Event" with respect to a Participant shall mean the death, Disability or Retirement of that Participant. "Stock" means the Common Stock, par value $.01 per share, of the Company. "Stock Option" means any option to purchase shares of Stock granted pursuant to Article 6; and, with respect to SARs, also includes options to purchase shares of Stock granted pursuant to Other Plans. "Subsidiary" means any present or future corporation which would be a "subsidiary corporation" as that term is defined in Section 424 of the Code. "Ten Percent Shareholder" means a person who on the Date of Grant owns, either directly or through attribution as provided in Section 424(d) of the Code, Stock possessing more than 10% of the total combined voting power of all classes of stock of his or her employer corporation or of any Parent or Subsidiary. 4 ARTICLE 3 ADMINISTRATION SECTION 3.1 THE ADMINISTRATOR. (a) Administrator. The Plan shall be administered by either (i) the Board; or (ii) the Committee (the group that administers the Plan is referred to as the "Administrator"). (b) Powers in General. The Administrator shall have the power and authority to grant to Eligible Persons, pursuant to the terms of the Plan: (i) Stock Options; (ii) SARs; (iii) Purchase Rights; or (iv) any combination of the foregoing. (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; (iv) to determine, subject to the limitations set forth in Article 7, when Rights are to be granted under the Plan; (v) from time to time to select, subject to the limitations set forth in this Plan, those Eligible Participants to whom Rights shall be granted; (vi) to determine the number of shares of Stock to be made subject to each Right; (vii) to prescribe the terms and conditions of each Stock Option, including, without limitation, the exercise price and medium of payment, to determine whether the Stock Option is to be an Incentive Stock Option or a Non-Statutory Option and to specify the provisions of the Stock Option agreement relating to such Stock Option; (viii) to prescribe the terms and conditions of each SAR, including, without limitation, to determine whether such SAR is to be granted alone or in tandem with Stock Options during the term of the Related SAR Option and to specify the provisions of the SAR agreement relating to such SAR including, without limitation, vesting provisions; (ix) to prescribe the terms and conditions of each Purchase Right, including, without limitation, the purchase price and medium of payment, vesting provisions and repurchase provisions, and to specify the provisions of the Stock purchase agreement relating to such sale; (x) to amend any outstanding Rights for the purpose of modifying the purchase price, exercise price or Initial Valuations (as defined in Article 7), as the case may be, thereunder or otherwise, subject to applicable legal restrictions and to the consent of the other party to such agreement; (xi) to determine when a consultant's relationship with the Company is sufficient to constitute employment with the Company for purposes of the Plan; (xii) to determine the duration and purpose of leaves of absences which may be granted to a Participant without constituting termination of their employment for purposes of the Plan; and (xiii) to make any and all other determinations which it determines to be necessary or advisable for administration of the Plan. (d) Decisions Final. All decisions made by the Administrator pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants. (e) The Committee. The Board may, in its sole and absolute discretion, from time to time delegate any or all of its duties and authority with respect to the Plan to a Committee of not less than two Directors to be appointed by and to serve at the pleasure of the Board. Once appointed, the Committee shall continue to serve until otherwise directed by the Board. From time to time, the Board may increase or decrease (to not less than two members) the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new members in substitution therefor, and fill vacancies, however caused, in the Committee. The Committee shall act pursuant to a vote of the majority of its members or, in the case of a Committee comprised of two Directors, the unanimous vote of its members, whether present or not, or by the written consent of the majority of its members or, in the case of a Committee comprised of two Directors, the unanimous vote of its members, and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitations prescribed by the Plan and the Board, the Committee may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable. 5 ARTICLE 4 STOCK SUBJECT TO PLAN SECTION 4.1 STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in Article 10, the total number of shares of Stock reserved and available for issuance under the Plan shall be 1,800,000 shares. The total number of shares of Stock with respect to which SARs granted with relating to Related SAR Options may be granted shall be equal to 1,800,000 shares. Solely for purposes of determining the number of shares of Stock reserved and available for issuance under the Plan, each SAR granted without relation to a Stock Option shall be treated as a Stock Option. Shares reserved hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. SECTION 4.2 UNEXERCISED RIGHTS. To the extent that any Rights expire or are otherwise terminated without being exercised, the shares underlying such Rights (and shares related thereto) shall again be available for issuance in connection with future Rights under the Plan. Shares acquired by the Company upon exercise of Rights pursuant to Section 6.2(e) or Section 8.2(c) or Section 12.3 shall not increase the shares available for issuance under the Plan. ARTICLE 5 ELIGIBILITY Officers, employees, consultants and Directors of the Company, any Parent or any Subsidiary, other than the Administrator, who are responsible for or contribute to the management, growth or profitability of the business of the Company, any Parent or any Subsidiary shall be eligible to be granted Rights hereunder subject to limitations set forth in this Plan. The Participants under the Plan shall be selected from time to time by the Administrator, in its sole discretion, from among those Eligible Persons. ARTICLE 6 STOCK OPTIONS SECTION 6.1 GENERAL. Stock Options may be granted alone or in addition to other Rights granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve, and the provisions of Stock Option grants need not be the same with respect to each Optionee or each Stock Option granted. Stock Options granted under the Plan may be either Incentive Stock Options or Non-Statutory Options. SECTION 6.2 TERMS AND CONDITIONS OF STOCK OPTIONS. Each Stock Option granted pursuant to the Plan shall be evidenced by a written option agreement between the Company and the Optionee, which agreement shall comply with and be subject to the following terms and conditions: (a) Number of Shares. Each Stock Option agreement shall state the number of shares of Stock to which the Stock Option relates. (b) Type of Option. Each Stock Option agreement shall identify the portion (if any) of the Stock Option which constitutes an Incentive Stock Option. 6 (c) Exercise Price. Each Stock Option agreement shall state the price at which shares subject to the Stock Option may be purchased (the "Exercise Price"), which shall with respect to Incentive Stock Options be not less than one hundred percent (100%) of the Fair Market Value of the shares of Stock on the Date of Grant; provided, however, that in the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the Exercise Price shall not be less than one hundred ten percent (110%) of such Fair Market Value. With respect to Non-Statutory Options, the Exercise Price shall not be less than eighty-five percent (85%) of the Fair Market Value of the shares of Stock on the Date of Grant of the Non-Statutory Option. (d) Value of Shares. The Fair Market Value of the shares of Stock (determined as of the Date of Grant) with respect to which Incentive Stock Options are exercisable by an Optionee under this Plan and all other incentive option plans of the Company and any Parent or Subsidiary shall not, in the aggregate, exceed $100,000 in any calendar year. (e) 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. (f) Term and Exercise of Stock Options. Stock Options shall be exercisable over the exercise period at the times the Administrator may determine, as reflected in the related Stock Option agreements. The exercise period of any Stock Option shall be determined by the Administrator, but shall not exceed ten years from the Date of Grant of the Stock Option. In the case of an Incentive Stock Option granted to a Ten Percent Shareholder, the exercise period shall be determined by the Administrator, but shall not exceed five years from the Date of Grant of the Stock Option. The exercise period shall be subject to earlier termination as provided in Sections 12.6 and 12.7. A Stock Option may be exercised, as to any or all full shares of Stock as to which the Stock Option has become exercisable, by giving written notice of such exercise to the Company. (g) Employee's or Engagement Agreement. Each person receiving a Stock Option under the Plan shall agree to remain in the employ of, and/or to render services pursuant to his or her engagement with, the Company, any Subsidiary or any Parent, as the Administrator may from time to time direct, for a period of one year from the Date of Grant, but such agreement shall not obligate the Company, any Subsidiary or any Parent to continue to employ or maintain the engagement of the Optionee for any period whatsoever. The sole remedy of the Company for breach of this employment or engagement term by the Optionee shall be cancellation of the Stock Option granted to the Optionee. ARTICLE 7 STOCK APPRECIATION RIGHTS SECTION 7.1 GENERAL. The Administrator shall have the authority to grant SARs in tandem with Stock Options granted under this Plan (the "Related SAR Option") with respect to all or some of the shares of Stock covered by the Related SAR Option. SARs granted in tandem with Related SAR Options may be granted either at the time of grant of the Related SAR Option or at any time thereafter during the term of the Related SAR Option. The Administrator shall also have the authority to grant SARs without relation to any Stock Option granted under this Plan. Each SAR shall be granted on such terms and conditions not inconsistent with the Plan as the Administrator may determine. The 7 provisions of the various SAR awards need not be the same with respect to each Grantee or with respect to any SARs granted to the same Grantee. SECTION 7.2 TERMS AND CONDITIONS OF SARS. Each SAR granted pursuant to the Plan shall be evidenced by a written SAR agreement between the Company and the Grantee, which agreement shall comply with and be subject to the following terms and conditions: (a) Number of SARs. Each SAR agreement shall state the number of SARs granted pursuant to the agreement. (b) Initial Valuations. Each SAR agreement shall provide that each SAR granted in tandem with a Related Stock Option is valued at the Exercise Price of the Related SAR Option and that each SAR granted without relation to a Stock Option is valued at the Fair Market Value of a share of Stock on the Date of Grant (the "Initial Valuation"). (c) Term and Exercise of SARs. (i) Each SAR granted otherwise than in tandem with a Stock Option shall be exercisable as determined by the Administrator, but in no event after 10 years from the date of Grant. Each other SAR shall be exercisable only if, and to the extent that, the Related SAR Option is exercisable and has not yet terminated or expired, and in the case of a SAR granted in respect of an Incentive Stock Option, only when the Fair Market Value per share of the Stock exceeds the Exercise Price of the Related SAR Option; and upon the exercise of a SAR, the Related SAR Option shall cease to be exercisable to the extent of the shares of Stock with respect to which such SAR is exercised, and shall be considered to have been exercised to that extent for purposes of determining the number of shares available for the grant of further Rights pursuant to the Plan. Upon the exercise or termination of a Related SAR Option, the SAR granted in tandem with such Related SAR Option shall terminate to the extent of the shares of Stock with respect to which the Related SAR Option was exercised or terminated. (ii) To exercise a SAR granted in tandem with a Related SAR Option, the Grantee shall (A) give written notice thereof to the Company specifying the number of shares of Stock with respect to which the SAR is being exercised and the percentage of the total amount that the Grantee is entitled to receive which the Grantee elects to receive in cash or shares of Stock with respect to the exercise of the SAR; and (B) if requested by the Administrator, deliver the Related SAR Option agreement to the Secretary of the Company, who shall endorse thereon a notation of such exercise and return the Related SAR Option agreement to the Grantee. To exercise a SAR granted without relation to a Stock Option, the Grantee shall give written notice thereof to the Company specifying the number of shares of Stock with respect to which the SAR is being exercised and the percentage of the total amount that the Grantee is entitled to receive which the Grantee elects to receive in cash or shares of Stock with respect to the exercise of the SAR. The date of exercise of a SAR which is validly exercised shall be deemed to be the date on which there shall have been delivered to the Company the appropriate aforesaid instruments. (iii) Upon the exercise of a SAR, the holder thereof shall be entitled at the holder's election to receive either: (A) a number of shares of Stock equal to the quotient computed by dividing the Spread (as defined in Section 7.2(c)(iv)) by the Fair Market Value per share of Stock on the date of exercise of the SAR; provided, however, that in lieu of fractional shares, the Company shall pay in cash or cash equivalent an amount equal to the same fraction of the Fair Market Value per share of Stock on the date of exercise of the SAR; or 8 (B) an amount of money payable in cash or cash equivalent equal to the Spread; or (C) a combination of an amount payable in cash or cash equivalent and a number of shares calculated as provided in Section 7.2(c)(iii)(A) (after reducing the Spread by such dollar amount); plus any amounts payable in lieu of any fractional shares as provided above. (iv) The term "Spread" as used in Section 7.2(c) shall mean an amount equal to the product computed by multiplying (A) the excess of (x) the Fair Market Value per share of Stock on the date the SAR is exercised, over either (y) in the case of an SAR granted in tandem with a Related SAR Option, the Exercise Price per share of the Related SAR Option, or (z) in the case of an SAR not granted in tandem with a Stock Option, the Initial Valuation of the SAR; by (B) the number of shares with respect to which such SAR is being exercised. (v) Notwithstanding the provisions of Section 7.2(c)(iii), the Administrator shall have sole discretion to consent to or disapprove a Participant's election to receive an amount of money payable in cash or cash equivalent in whole or in part ("Cash Election") upon the exercise of a SAR. Such consent or disapproval may be given at any time after the election to which it relates. If the Administrator shall disapprove a Cash Election the exercise of the SAR with respect to which the Cash Election was made shall be of no effect, but without prejudice to the right of the holder to exercise such SAR in the future in accordance with its terms. (vi) Notwithstanding the foregoing, in the case of a SAR granted in tandem with an Incentive Stock Option, the holder may not receive an amount in excess of such amount as will enable the Stock Option to qualify as an Incentive Stock Option. (d) Securities Laws. The Company intends that this Section 7.2 shall comply with the requirements of Rule 16b-3 and any future rules promulgated in substitution therefor (the "Rule") under the Exchange Act, during the term of the Plan. Should any provision of Section 7.2 not be necessary to comply with the requirements of the Rule or should any additional provisions be necessary for Section 7.2 to comply with the requirements of the Rule, the Board may amend the Plan to add to or modify the provisions of the Plan accordingly. (e) Limitation on Amounts Payable. Notwithstanding Section 7.2(c)(iii), the Administrator may place a limitation on the amount payable in cash, Stock or both upon exercise of a SAR. Any such limitation must be determined as of the Date of Grant, and noted on the instrument evidencing the Participant's SAR granted hereunder. ARTICLE 8 PURCHASE RIGHTS SECTION 8.1 GENERAL. Purchase Rights may be granted alone or in addition to other Rights under the Plan. Each sale of Stock under this Article 8 shall be evidenced by a Stock purchase agreement between the Offeree and the Company in the form from time to time adopted by the Administrator and containing such terms and conditions which the Administrator deems appropriate; provided, that such terms and conditions are not inconsistent with the Plan. The provisions of the various Stock purchase agreements entered into under the Plan need not be identical. 9 SECTION 8.2 TERMS AND CONDITIONS OF PURCHASE RIGHTS. Each Purchase Right granted pursuant to the Plan shall be evidenced by a written Stock purchase agreement between the Company and the Offeree, which agreement shall comply with and be subject to the following terms and conditions: 10 (a) Number of Shares. Each Stock purchase agreement shall state the number of shares of Stock which may be purchased pursuant to such agreement. (b) Purchase Price. Each Stock purchase agreement shall state the price at which the Stock subject to such purchase agreement may be purchased (the "Purchase Price"); provided, however, that the Purchase Price shall not be less than 85% of the Fair Market Value of the Stock on the Date of Grant. (c) Medium and Time of Payment. The Purchase Price shall be paid in full, at the time of exercise, in cash or cash equivalent 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 Purchase Price or in a combination of cash or cash equivalent 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 the purchase price exceeds the par value of the shares so purchased, with monies borrowed from the Company in accordance with Section 12.5 of the Plan. ARTICLE 9 [INTENTIONALLY OMITTED] ARTICLE 10 ADJUSTMENTS SECTION 10.1 EFFECT OF CERTAIN CHANGES. (a) Stock Dividends, Splits, Etc.. If there is any change in the number of outstanding shares of Stock through the declaration of Stock dividends or through a recapitalization resulting in Stock splits, or combinations or exchanges of the outstanding shares, (i) the number of shares of Stock available for Rights, (ii) the number of shares covered by outstanding Rights, (iii) the Exercise Price or Purchase Price of any Stock Option or Purchases Right and (iv) the Initial Valuations of SARs, in effect prior to such change shall be proportionately adjusted by the Administrator to reflect any increase or decrease in the number of issued shares of Stock; provided, however, that any fractional shares resulting from the adjustment shall be eliminated. (b) Liquidating Event. In the event of the proposed dissolution or liquidation of the Company, or in the event of any corporate separation or division, including, but not limited to, a split-up, split-off or spin-off (each, a "liquidating event"), the Administrator may provide that the holder of any Right then exercisable shall have the right to exercise such Right (at the price provided in the Rights agreement) subsequent to the liquidating event, and for the balance of its term, solely for the kind and amount of shares of Stock and other securities, property, cash or any combination thereof receivable upon such liquidating event by a holder of the number of shares of Stock for or with respect to which such Right might have been exercised immediately prior to such liquidating event; or the Administrator may provide, in the alternative, that each Right granted under the Plan shall terminate as of a date to be fixed by the Board; provided, however, that not less than 30 days written notice of the date so fixed shall be given to each Rights holder and if such notice is given, each Rights holder shall have the right, during the period of 30 days preceding such termination, to exercise the Right as to all or any part of the shares of Stock covered thereby, without regard to any installment or vesting provisions in his or her Rights agreement, on the condition, however, that the liquidating event actually occurs; and if the liquidating event actually occurs, such exercise shall be deemed effective (and, if applicable, the Rights holder shall be deemed a shareholder with respect to the Rights exercised immediately preceding the occurrence of the liquidating event, or the date of record for shareholders entitled to share in such liquidating event, if a record date is set). 11 (c) Merger or Consolidation. Each outstanding Right shall terminate upon a merger or consolidation in which the Company is not the surviving corporation, provided that (A) each Rights holder to whom no Rights have been tendered by the surviving corporation pursuant to the terms of item (B) immediately below shall have the right exercisable during a ten-day period ending on the fifth day prior to such merger or consolidation in which the Company is not the surviving corporation, to exercise his or her Rights in whole or in part, without regard to any installment provisions under his or her Rights agreement on the condition, however, that the merger or consolidation is actually effected; and if the merger or consolidation is actually effected, such exercise shall be deemed effective (and, if applicable, the Participant shall be deemed a shareholder with respect to the Rights exercised) immediately preceding the effective time of such merger or consolidation (on the date of record for shareholders entitled to share in the securities or property distributed in such merger or consolidation, if a record date is set); and (B) in its sole and absolute discretion, the surviving corporation may, but shall not be obligated to, tender to any Rights holder Rights with respect to the surviving corporation, and such new Rights shall contain such terms and provisions as shall substantially preserve the rights and benefits of any Rights then outstanding under this Plan. (d) Where Company Survives. Section 10.1(c) shall not apply to a merger or consolidation in which the Company is the surviving corporation, unless shares of Stock are converted into or exchanged for securities other than publicly-traded common stock, cash (excluding cash in payment for actual shares) or any other thing of value. Notwithstanding the preceding sentence, in case of any consolidation or merger of another corporation into the Company in which the Company is the surviving corporation and in which there is a reclassification or change (including a change to the right to receive an amount of money payable by cash or cash equivalent or other property) of the shares of Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any change in such shares into two or more classes or series of shares), the Administrator may provide that the holder of each Right then exercisable shall have the right to exercise such Right solely for the kind and amount of shares of Stock and other securities (including those of any new direct or indirect Parent of the Company), property, cash or any combination thereof receivable upon such reclassification change, consolidation or merger by the holder of the number of shares of Stock for which such Right might have been exercised. (e) Surviving Corporation Defined. The determination as to which party to a merger or consolidation is the "surviving corporation" shall be made on the basis of the relative equity interests of the shareholders in the corporation existing after the merger or consolidation, as follows: if following any merger or consolidation the holders of outstanding voting securities of the Company immediately prior to the merger or consolidation own equity securities possessing more than fifty percent (50%) of the voting power of the corporation existing following the merger or consolidation, then for purposes of this Plan, the Company shall be the surviving corporation. In all other cases, the Company shall not be the surviving corporation. In making the determination of ownership by the shareholders of a corporation immediately after the merger or consolidation, of equity securities pursuant to this Section 10.1(e), equity securities which the shareholders owned immediately before the merger or consolidation as shareholders of another party to the transaction shall be disregarded. Further, for purposes of this Section 10(e) only, outstanding voting securities of a corporation shall be calculated by assuming the conversion of all equity securities convertible (immediately or at some future time) into shares entitled to vote. (f) Par Value Changes. In the event of a change in the Stock of the Company as presently constituted which is limited to a change of all of its authorized shares with par value, into the same number of shares without par value, or a change in the par value, the shares resulting from any such change shall be "Stock" within the meaning of the Plan. (g) Decision of Administration Final. To the extent that the foregoing adjustments relate to stock or securities of the Company, such adjustments shall be made by the Administrator, whose determination in that respect shall be final, binding and conclusive; provided that each Incentive Stock Option granted pursuant to the Plan shall not be adjusted in a manner that causes such Stock Option to fail to continue to qualify as an Incentive Stock Option. 12 (h) No Other Rights. Except as hereinbefore expressly provided in this Article 10, no Rights holder shall have any rights by reason of any subdivision or consolidation of shares of Stock or the payment of any dividend or any other increase or decrease in the number of shares of Stock of any class or by reason of any liquidating event, merger, or consolidation of assets or stock of another corporation, or any other issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class; and except as provided in this Article 10, none of the foregoing events shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Stock subject to Rights. The grant of a Right pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. (i) No Rights as Shareholder. Except as specifically provided in this Article 10, a Rights holder or a transferee of a Right shall have no rights as a shareholder with respect to any shares covered by the Rights until the date of the issuance of a Stock certificate to him or her for such shares, and no adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions of other rights for which the record date is prior to the date such Stock certificate is issued, except as provided in Section 10.1(b) or 10.1(c). ARTICLE 11 AMENDMENT AND TERMINATION The Board may, at any time, amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair the rights of a Participant under any Right theretofore granted without such Participant's consent. Stockholder approval for amendments to the Plan shall be obtained in such a manner and to such degree as required to comply with all applicable laws and regulations. The Administrator may amend the terms of any Right theretofore granted, prospectively or retroactively, but, subject to Article 3, no such amendment shall impair the rights of any Participant under any Right theretofore granted without such Participant's consent. ARTICLE 12 GENERAL PROVISIONS SECTION 12.1 GENERAL RESTRICTIONS. (a) No View to Distribute. The Administrator may require each person purchasing shares of Stock pursuant to the Plan to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. The certificates for such shares may include any legend which the Administrator deems appropriate to reflect any restrictions on transfer. (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. 13 SECTION 12.2 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. SECTION 12.3 WITHHOLDING TAXES. (a) Withholding Required. Each Participant shall, no later than the date as of which the value of a Right first becomes includable in the gross income of the Participant for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to the Right or its exercise. The obligations of the Company under the Plan shall be conditioned upon such payment or arrangements and the Participant shall, to the extent permitted by law, have the right to request that the Company deduct any such taxes from any payment of any kind otherwise due to the Participant. (b) Withholding Right. The Administrator may, in its discretion, grant a Rights holder the right (a "Withholding Right") to elect to make such payment by irrevocably requiring the Company to withhold from shares issuable upon exercise of the Right that number of full shares of Common Stock having a Fair Market Value on the Tax Date (as defined below) equal to the amount (or portion of the amount) required to be withheld. The Withholding Right may be granted with respect to all or any portion of the Right. (c) Exercise of Withholding Right. To exercise a Withholding Right, the Rights holder must follow the election procedures set forth below, together with such additional procedures and conditions as may be set forth in the related Rights agreement or otherwise adopted by the Administrator: (i) The Rights holder must deliver to the Company his or her written notice of election (the "Election") to have the Withholding Right apply to all (or a designated portion) of his or her Right. (ii) The Election must be delivered to the Company not less than 20 days before the date of exercise of the Right to which it relates; (iii) unless disapproved by the Administrator as provided in Subsection (iv) below, the Election once made will be irrevocable; and (iv) no Election is valid unless the Administrator consents to the Election; the Administrator has the right and power, in its sole discretion, with or without cause or reason therefor, to consent to the Election, to refuse to consent to the Election, or to disapprove the Election; and if the Administrator has not consented to the Election on or prior to the date that the amount of tax to be withheld is, under applicable federal income tax laws, fixed and determined by the Company (the "Tax Date"), the Election will be deemed approved. (d) Effect. If the Administrator consents to an Election of a Rights Holder's Withholding Right, then upon the exercise of the Right (or any portion thereof) to which the Withholding Right relates, the Company will withhold from the shares otherwise issuable that number of full shares of Stock having an actual Fair Market Value equal to the amount (or portion of the amount, as applicable) required to be withheld under applicable federal and/or state income tax laws as a result of the exercise. SECTION 12.4 INDEMNIFICATION. In addition to such other rights of indemnification as they may have as Directors or members of the Committee, and to the extent allowed by applicable law, the Administrators shall be indemnified by the Company 14 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 or any option granted under 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 unreasonably 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. SECTION 12.5 LOANS. The Company may make loans to Optionees and Offerees as the Administrator, in its discretion, may determine in connection with the exercise of outstanding Stock Options and Purchase Rights granted under the Plan. Such loans shall (i) be evidenced by promissory notes entered into by the holders in favor of the Company; (ii) be subject to the terms and conditions set forth in this Section 12.5 and such other terms and conditions, not inconsistent with the Plan, as the Administrator shall determine; and (iii) bear interest, if any, at such rate as the Administrator shall determine. In no event may the principal amount of any such loan exceed the Exercise Price or the Purchase Price less the par value of the shares of Stock covered by the Stock Option or Purchase Right, or portion thereof, exercised by the Optionee or Offeree. The initial term of the loan, the schedule of payments of principal and interest under the loan, the extent to which the loan is to be with or without recourse against the holder with respect to principal and applicable interest and the conditions upon which the loan will become payable in the event of the holder's termination of employment shall be determined by the Administrator; provided, however, that the term of the loan, including extensions, shall not exceed 10 years. Unless the Administrator determines otherwise, when a loan shall have been made, shares of Stock having a Fair Market Value at least equal to the principal amount of the loan shall be pledged by the holder to the Company as security for payment of the unpaid balance of the loan and such pledge shall be evidenced by a pledge agreement, the terms of which shall be determined by the Administrator, in its discretion; provided, however, that each loan shall comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. SECTION 12.6 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. SECTION 12.7 SPECIAL TERMINATING EVENTS. If a Special Terminating Event occurs, all Rights theretofore granted to such Rights holder may, unless earlier terminated in accordance with their terms, be exercised by the Rights holder or by his or her estate or by a person who acquired the right to exercise such Right by bequest or inheritance or otherwise by reason of the death or Disability of the Rights holder, at any time within one year after the date of the Special Terminating Event. 15 Notwithstanding the foregoing, an Incentive Stock Option and any SAR granted in relation to an Incentive Stock Option shall only be exercisable at any time within three months after the date of Retirement or termination of employment of an Optionee. SECTION 12.8 NON-TRANSFERABILITY OF RIGHTS. Unless otherwise approved by the Administrator, Rights granted under the Plan shall not be transferable otherwise than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order (as defined in the Code), and Rights may be exercised, during the lifetime of the Rights holder, only by the Rights holder or by his or her guardian or legal representative. SECTION 12.9 REGULATORY MATTERS. Each Rights agreement shall provide that no shares shall be purchased or sold thereunder unless and until (A) any then applicable requirements of state or federal laws and regulatory agencies shall have been fully complied with to the satisfaction of the Company and its counsel, and (B) is required to do so by the Company, the Optionee or Offeree shall have executed and delivered to the Company a letter of investment intent in such form and containing such provisions as the Board or Committee may require. SECTION 12.10 RECAPITALIZATIONS. Each Stock Option and Purchase Right Agreement shall contain provisions required to reflect the provisions of Article 10. SECTION 12.11 DELIVERY. Upon exercise of a Right granted under this Plan, the Company shall issue Stock or pay any amounts due within a reasonable period of time thereafter. Subject to any statutory obligations the Company may otherwise have, for purposes of this Plan, thirty days shall be considered a reasonable period of time. SECTION 12.12 OTHER PROVISIONS. The Rights agreements authorized under the Plan may contain such other provisions not inconsistent with this Plan, including, without limitation, restrictions upon the exercise of the Rights, as the Administrator may deem advisable. 16 ARTICLE 13 EFFECTIVE DATE OF PLAN The Plan shall become effective on the date on which the Plan is adopted by the Board and approved by its shareholders. Any Right granted before the approval of the Plan by the Company's shareholders shall be expressly conditioned upon, and shall not be exercisable until, such approval is obtained. ARTICLE 14 TERM OF PLAN No Right shall be granted pursuant to the Plan on or after January 1, 2002, but Rights theretofore granted may extend beyond that date. EX-10.76 15 EXHIBIT 10.76 1 EXHIBIT 10.76 3/16/98 BANK LOAN 2 SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT THIS SECOND AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment"), dated as of March 16, 1998, is entered into by and among THE SPORTS CLUB COMPANY, INC., a Delaware corporation, and certain of its subsidiaries identified in the signature pages to this Amendment (collectively, "Borrowers"), SUMITOMO BANK OF CALIFORNIA, a California banking corporation ("Sumitomo"), COMERICA BANK -CALIFORNIA, a California banking corporation ("Comerica", and collectively with Sumitomo, "Banks"), and Sumitomo in its capacity as agent for Banks (in such capacity, "Agent"), in light of the following facts: RECITALS A. Pursuant to that certain Amended and Restated Loan Agreement, dated as of February 2, 1998 and as amended by a First Amendment to Amended and Restated Loan Agreement dated as of February 23, 1998 (collectively, the "Loan Agreement"), Banks are providing Borrowers with certain credit facilities. B. Borrowers, Banks and Agent wish to amend the Loan Agreement to, among other things, provide for the deferment of the termination of the Commitment and prepayment of the Obligations. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Banks and the Agent hereby agree as follows: 1. Defined Terms. All initially capitalized terms set forth without definition in this Amendment (including, without limitation, in the recitals hereto) shall have the respective meanings assigned thereto in the Loan Agreement. 2. Amendments to Definitions. Section 1.1 of the Loan Agreement is hereby amended such that the definition set forth below shall read in full as follows: "Line B Availability" means, as of each date of determination, the Line B Commitment minus the aggregate amount of all Line B Loans made by the Banks (including any Outstanding Standby Letters of Credit, not to exceed the Maximum Standby Letter of Credit Amount), less any amount by which Borrowers have failed to comply with the Liquidity Requirement and less any permanent reductions pursuant to Section 2.2(a). 2. Standby Letters of Credit. (a) Section 2.6(a) of the Loan Agreement is amended and restated to read as follows: 3 "(a) Subject to the terms and conditions hereof, at any time and from time to time from the Closing Date to the earlier of 60 days from the Effective Date or June 29, 1998, the Issuing Bank shall issue such Standby Letters of Credit as a Responsible Official of a Borrower on behalf of the Borrowers may request by a Request for Standby Letter of Credit' provided that, upon giving effect to such Standby Letter of Credit, (i) the Total Outstanding shall not exceed $15,000,000, (ii) the issuance of the Standby Letter of Credit shall not result in an amount which exceeds the Line B Availability and (iii) the Outstanding Standby Letters of Credit shall not exceed the Maximum Standby Letter of Credit Amount. If any Standby Letter of Credit is canceled or otherwise expires or terminates without I it being drawn upon, such cancellation, expiration or termination shall not effect a permanent reduction of the Line B Availability pursuant to Section 2.2(a) by the amount of such Standby Letter of Credit, but instead such amount may be reborrowed. Unless the Requisite Banks otherwise consent in writing, the term of any Standby Letter of Credit shall not exceed the earlier of 60 days from the Effective Date or June 30, 1998. If, as of the immediately preceding date, or upon any earlier termination or acceleration of the Commitment and any Loans thereunder, there exist any Outstanding Standby Letters of Credit, Borrowers shall provide to Agent a standby letter of credit issued by a bank satisfactory to the Requisite Banks, in form and substance satisfactory to the Requisite Banks, in favor of the Banks in a face amount equal to Outstanding Standby Letters of Credit on that date, or shall make other provisions satisfactory to the Requisite Banks for the collateralization or settlement of such Outstanding Standby Letters of Credit. No Standby Letter of Credit shall be issued except in the ordinary course of business of Borrowers or their Subsidiaries. Unless otherwise agreed to by the Requisite Banks, the face amount of any Standby Letter of Credit shall not be less than $250,000." 4. Equity or Debt Offering. Section 3.1 (f) of the Loan Agreement is amended and restated to read as follows: "(f) In addition to all other payments hereunder, all Obligations, including payment of all indebtedness owing under the Notes, shall be fully due and payable upon the consummation of SCC, Inc.'s $50,000,000 proposed securities offering or other equity or debt offering in any amount by or for the benefit of any of the Borrowers, and the Commitment shall terminate; provided, however that if (i) the proposed $50,000,000 equity offering is consummated on or before April 30, 1998 and (ii) within 5 days thereafter, Borrower shall have complied with the conditions precedent to this Second Amendment, Banks will defer the acceleration of all Obligations pursuant to this Section 3.1(f) for a period of 60 days following the consummation of such offering but in any event not later than June 30,1998. Consummation of the $50,000,000 equity offering shall mean SCC, Inc.'s successfully concluding the sale of a sufficient number of shares of common stock to raise, after deduction for normal expenses, not less than $40 million with such proceeds irrevocable delivered to SCC, Inc. 4 5. Indebtedness, Guaranties and Liens. Section 6.9(c) of the Loan Agreement is amended and restated to read as follows: "(c) Indebtedness and Liens securing obligations incurred in connection with the financing or re-financing of any real property assets of Borrowers or Non-Borrower Affiliates, to the extent such financing has been approved by the Requisite Banks, or (ii) incurred in connection with SCC Inc.'s $50,000,000 proposed securities offering or other equity or debt offering in any amount by or for the benefit of any of the Borrowers, to the extent approved by the Requisite Banks." 6. Conditions Precedent. The effectiveness of Section 4 of this Amendment ("Effective Date") is subject to the prior satisfaction of each of the following conditions: (a) all obligations owing by any Borrower to AT&T Commercial shall have been fully paid, all collateral for such AT&T obligations shall have been released, all security interests, Liens or Guaranties in favor of AT&T shall have been terminated and the Special Deposit Account Agreement and Subordination Agreement shall have been terminated. 7. Representations and Warranties. Each representation and warranty made by the Borrowers in Article 4 of the Loan Agreement is true and correct on and as of the date hereof as though made as of the date hereof, except to the extent such representations and warranties relate solely to an earlier date. 8. Full Force and Effect. Each of the Loan Documents is hereby amended such that all references to the Loan Agreement contained in any of such documents shall be deemed to be made with respect to the Loan Agreement as amended by this Amendment. Except as amended hereby, the Loan Agreement and the other Loan Documents shall remain unaltered and in full force and effect. 9. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall constitute an original and all of which, taken together, shall constitute but one and the same instrument. 5 IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their respective duly authorized officers as of the date first above written. The "Borrowers" THE SPORTS CLUB COMPANY, INC., a Delaware corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer THE SPECTRUM CLUB COMPANY, INC., a California corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer PONTIUS REALTY, INC., a New York corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer SPORTS CLUB, INC. OF CALIFORNIA, a California corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer 6 IRVINE SPORTS CLUB, INC., a California corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer THE SPORTSMED COMPANY, INC., a California corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer L.A./IRVINE SPORTS CLUB,LTD., a California limited partnership By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer TALLA NEW YORK, INC. a New York corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer SCC SPORTS CLUB, INC., a Texas corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer 7 GREEN VALLEY SPECTRUM CLUB, INC., a Nevada corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer SPECTRUM CLUB/ANAHEIM HILLS, INC., a California corporation By /s/ Timothy O'Brien ------------------------------------ Timothy O'Brien Chief Financial Officer The "Agent" SUMITOMO BANK OF CALIFORNIA, a California banking corporation By /s/ Noel R. Ryan, Jr. ------------------------------------ Noel R. Ryan, Jr. Senior Vice President The "Banks" SUMITOMO BANK OF CALIFORNIA, a California banking corporation By /s/ Noel R. Ryan, Jr. ------------------------------------ Noel R. Ryan, Jr. Senior Vice President 8 COMERICA BANK - CALIFORNIA, A California banking corporation By /s/ Joseph Yurosek ------------------------------------ Joseph Yurosek Vice President Address: Comerica Bank - California 301 E. Ocean Boulevard, Suite 1800 Long Beach, California 90802 Attn: Joseph Yurosek, Vice President Telecopier: (562) 595-8251 Telephone: (562) 590-2530 EX-10.77 16 EXHIBIT 10.77 1 EXHIBIT 10.77 6/9/98 BANK LOAN 2 ================================================================================ SECOND AMENDED AND RESTATED LOAN AGREEMENT Dated as of June 9, 1998 between THE SPORTS CLUB COMPANY, INC., and various of its subsidiaries, as Borrowers, and SUMITOMO BANK OF CALIFORNIA, COMERICA BANK-CALIFORNIA, and such other financial institutions as may become a lending party hereto as Banks and SUMITOMO BANK OF CALIFORNIA, as Agent ================================================================================ 3 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS................................................1 1.1 Defined Terms................................................................1 1.2 Use of Defined Terms........................................................12 1.3 Accounting Terms............................................................12 1.4 Exhibits and Schedules......................................................12 ARTICLE 2 LOANS AND LETTERS OF CREDIT....................................................13 2.1 General Provisions Regarding Loans and Borrowing Procedures.................13 2.2 Intentionally Omitted.......................................................14 2.3 Prime Rate Loans............................................................14 2.4 Eurodollar Loans............................................................14 2.5 Redesignation of Loans......................................................14 2.6 Standby Letters of Credit...................................................15 2.7 Agent's Right to Assume Funds Available for Advances........................18 ARTICLE 3 PAYMENTS AND FEES..............................................................19 3.1 Principal and Interest......................................................19 3.2 Commitment Fee..............................................................20 3.3 Eurodollar Fees and Costs...................................................20 3.4 Letter of Credit Fees.......................................................22 3.5 Agent Fee...................................................................22 3.6 Late Payments/Default Rate..................................................22 3.7 Computation of Interest and Fees............................................23 3.8 Non-Banking Days............................................................23 3.9 Manner and Treatment of Payments............................................23 3.10 Funding Sources.............................................................23 3.11 Failure to Charge Not Subsequent Waiver.....................................24 3.12 Agent's Right to Assume Payments Will be Made by Borrowers..................24 3.13 Survivability...............................................................24 3.14 Unused Line Fee.............................................................24 ARTICLE 4 REPRESENTATIONS AND WARRANTIES.................................................25 4.1 Existence and Qualification; Power; Compliance With Laws....................25 4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations....................................................26 4.3 No Governmental Approvals Required..........................................27 4.4 Subsidiaries................................................................27 4.5 Financial Statements........................................................28 4.6 No Other Liabilities; No Material Adverse Changes...........................28
4 4.7 Intangible Assets...........................................................28 4.8 Filing of Financing Statements..............................................28 4.9 Public Utility Holding Company Act..........................................28 4.10 Litigation..................................................................29 4.11 Binding Obligations.........................................................29 4.12 No Default..................................................................29 4.13 ERISA.......................................................................29 4.14 Regulations T, U and X; Investment Company Act..............................30 4.15 Disclosure..................................................................30 4.16 Tax Liability...............................................................30 4.17 Projections.................................................................30 4.18 Fiscal Year.................................................................30 4.19 Employee Matters............................................................30 ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS)......31 5.1 Payment of Taxes and Other Potential Charges................................31 5.2 Preservation of Existence...................................................31 5.3 Maintenance of Properties...................................................31 5.4 Maintenance of Insurance....................................................31 5.5 Compliance With Laws........................................................32 5.6 Additional Borrowers........................................................32 5.7 Inspection Rights...........................................................32 5.8 Keeping of Records and Books of Account.....................................33 5.9 Compliance With Agreements, Duties and Obligations..........................33 5.10 Use of Proceeds.............................................................33 ARTICLE 6 NEGATIVE COVENANTS.............................................................34 6.1 Disposition of Property.....................................................34 6.2 Transactions with Borrowers and Non-Borrower Affiliates.....................34 6.3 Mergers, Acquisitions and New Club Developments.............................34 6.4 Profitability...............................................................37 6.5 Redemption, Dividends and Distributions; Payments to Partners...............37 6.6 ERISA.......................................................................38 6.7 Change in Nature of Business/Management.....................................38 6.8 Intentionally Omitted.......................................................38 6.9 Indebtedness, Guaranties and Liens..........................................39 6.10 Transactions with Affiliates................................................40 6.11 Change in Fiscal Year.......................................................40 6.12 Capital Expenditures and Purchase Money Transactions........................40 6.13 Tangible Net Worth..........................................................41 6.14 Ratio of Total Unsubordinated Liabilities to Tangible Net Worth.............41 6.15 Debt Service Coverage Ratio.................................................41 6.16 Intentionally Omitted.......................................................41
5 6.17 Loans to Officers...........................................................41 6.18 Deposit Accounts............................................................41 6.19 Ratio of Funded Debt to EBITDA..............................................41 ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS.........................................43 7.1 Financial and Business Information..........................................43 7.2 Compliance Certificates.....................................................45 7.3 Revisions or Updates to Schedules...........................................46 ARTICLE 8 CONDITIONS.....................................................................47 8.1 Initial Loans, Etc..........................................................47 8.2 Any Loan....................................................................48 ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT...........................50 9.1 Events of Default...........................................................50 9.2 Remedies Upon Event of Default..............................................52 ARTICLE 10 THE AGENT.....................................................................54 10.1 Appointment and Authorization...............................................54 10.2 Agent and Affiliates........................................................54 10.3 Proportionate Interest of the Banks in any Collateral.......................54 10.4 Banks' Credit Decisions.....................................................54 10.5 Action by Agent.............................................................55 10.6 Liability of Agent..........................................................55 10.7 Indemnification.............................................................56 10.8 Successor Agent.............................................................57 ARTICLE 11 MISCELLANEOUS.................................................................58 11.1 Intentionally Omitted.......................................................58 11.2 Cumulative Remedies; No Waiver..............................................58 11.3 Amendments; Consents........................................................58 11.4 Costs, Expenses and Taxes...................................................59 11.5 Nature of Banks' Obligations................................................59 11.6 Survival of Representations and Warranties..................................59 11.7 Notices.....................................................................60 11.8 Execution of Loan Documents.................................................60 11.9 Sharing of Setoffs..........................................................60 11.10 Binding Effect; Assignment.................................................61 11.11 Assignment of Deposits.....................................................61 11.12 Participation of Loan......................................................61 11.13 Indemnity by Borrowers.....................................................61 11.14 Nonliability of Banks......................................................62
6 11.15 No Third Parties Benefited.................................................63 11.16 Further Assurances.........................................................63 11.17 Integration................................................................63 11.18 Governing Law..............................................................63 11.19 Severability of Provisions.................................................63 11.20 Headings...................................................................63 11.21 Time of the Essence........................................................63 11.22 Securities Representation..................................................64 11.23 Joint Borrower Provisions..................................................64 11.24 Waiver of Jury Trial.......................................................69
7 Exhibits A Global Collateral Documents Amendment B Note C Request for Standby Letter of Credit D Request for Loan E Request for Redesignation of Loans F Vertical Club Materials G Houston Sports Club Materials Schedules 4.2 Necessary Consents 4.4 Subsidiaries 4.6 Material Contingent Liabilities 4.8 Governmental Agencies With Which Financing Statements Need be Filed and/or Recorded 4.10 Litigation 4.13 Plans Subject to ERISA 4.17 Projections 5.2 Preservation of Existence 5.6 Additional Borrowers 6.3(c) Existing New Club Development Projects 6.9 Indebtedness, Guaranties and Liens 6.10 Transactions with Affiliates 6.17 Loans to Officers 8 SECOND AMENDED AND RESTATED LOAN AGREEMENT Dated as of June 9, 1998 WHEREAS, The Sports Club Company, Inc., The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine Sports Club, Inc., The SportsMed Company, Inc., formerly HealthFitness Organization of America, Inc., L.A./Irvine Sports Clubs, Ltd., Talla New York, Inc., SCC Sports Club, Inc., Spectrum Club/Anaheim Hills, Inc. and Green Valley Spectrum Club, Inc. are parties to that certain Amended and Restated Loan Agreement dated as of February 2, 1998 as amended by a First Amendment dated as of February 23, 1998 and a Second Amendment dated as of March 16, 1998 (collectively, the "Original Loan Agreement") with Sumitomo Bank of California and Comerica Bank - California as lenders and Agent (as defined below) as the agent for such lenders; and WHEREAS, Borrowers (as defined below), Sumitomo Bank of California, Comerica Bank -California and Agent have agreed to amend and restate the Original Loan Agreement to provide for, among other things, an increase in the amount and an extension of the term of the credit facilities, a reduction in the interest rates applicable to the credit facilities, and certain modifications to the financial covenants; and WHEREAS, Borrowers, Agent and Banks (as defined below) do hereby enter into this Second Amended and Restated Loan Agreement in place and stead of the Original Loan Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth respectively after each: "Acquisition" means any transaction, or any series of related transactions, by which any Borrower and/or any of its Subsidiaries directly or indirectly acquires control of any going business or all or substantially all of the assets of any firm, partnership, joint venture, limited liability company, corporation (or division thereof) operating as a health and fitness facility, whether through purchase of assets, merger or otherwise, (control meaning possession, directly or indirectly, of the power to direct or cause the direction of management or policies of such entities); provided that, in any event, the term "Acquisition" shall include any acquisition in which any Borrower and/or any Subsidiaries thereof controls a majority in ordinary voting power of the securities of a corporation operating as a health and fitness facility which have ordinary voting power for the election of directors or other governing body of a corporation (other than securities having such power only by reason of the happening of a contingency), or control 50% or more ownership interest in any partnership, limited liability company or joint venture operating as a health and fitness facility. "Affiliate" means, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (and its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person that owns, directly or indirectly, 50% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation (other than securities having such power only by reason of the happening of a contingency), or 50% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person), will be deemed to control such corporation or other Person. 9 "Agent" means Sumitomo Bank of California, a California state bank, when acting in its capacity as agent under any of the Loan Documents, and any successor agent. "Agent's Office" means the office designated by Agent as its address for purposes of notice under this Agreement. "Agreement" means this Second Amended and Restated Loan Agreement, either as originally executed or as it may from time to time be supplemented, modified, amended, restated or extended. "Applicable Pricing Level" means, for any Eurodollar Period, the pricing level set forth below opposite the ratio of Funded Debt to EBITDA, which Agent shall determine quarterly upon, and with effect from and after the date of, Agent's receipt of the quarterly compliance certificates required by Section 7.2 of this Agreement:
Ratio of Funded Debt Pricing Level to EBITDA ------------- -------------------------------------- I Less than 2.50 to 1.0 II Equal to or greater than 2.50 to 1.00 but less than 3.25 to 1.00 III Equal to or greater than 3.25 to 1.00.
"Bank" or "Banks" means individually or collectively Sumitomo Bank of California, Comerica Bank - California and any one or more banks or other financial institutions which become lending parties to this Agreement in accordance with the terms hereof. "Banking Day" means any Monday, Tuesday, Wednesday, Thursday or Friday on which all of the Banks are open for business at their respective addresses for notice designated as provided herein. "Borrower or Borrowers" means, individually or collectively, The Sports Club Company, Inc., The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine Sports Club, Inc., The SportsMed Company, Inc., L.A./Irvine Sports Clubs, Ltd., Talla New York, Inc., SCC Sports Club, Inc., Green Valley Spectrum Club, Inc., Spectrum Club Anaheim and any subsequent Person who becomes a Borrower pursuant to the terms hereof. "Capital Expenditure" means any expenditure (including any capitalized lease expenditure) that is considered a capital expenditure under generally accepted accounting principles, consistently applied, including, without limitation, any amount that is required to be treated as a capitalized asset pursuant to Financial Accounting Standards Board Statement No. 13. "Cash" means, when used in connection with any Person, all monetary and non-monetary items belonging to such Person that are treated as cash in accordance with generally accepted accounting principles, consistently applied. "Cash Equivalents" means, when used in connection with any Person, such Person's Investments in: (a) Government Securities due within one year after the date of the making of the Investment; (b) certificates of deposit issued by, bank deposits in, bankers' acceptances of, and repurchase agreements covering, Government Securities executed by, any bank doing business in and incorporated under the Laws of the United States of America or any state thereof and 10 having on the date of such Investment combined capital, surplus and undivided profits of at least $100,000,000, in each case due within one year after the date of the making of the Investment; and/or (c) readily marketable commercial paper of corporations doing business in and incorporated under the Laws of the United States of America or any state thereof given on the date of such Investment the highest credit rating by NCO/Moody's Commercial Paper Division of Moody's Investors Service, Inc. or Standard & Poor's Corporation, in each case due within six months after the date of the making of the Investment. "Certificate of a Responsible Official" means a certificate signed by a Responsible Official of the Person providing the certificate. "Closing Date" means the Banking Day on which the consummation of all of the transactions contemplated in Section 8.1 occurs. "Club" means a health and fitness facility operated by any Borrower. "Collateral" means, collectively, all Property on or in which the Agent or any Bank has a Lien pursuant to this Agreement or any other Loan Document. "Commitment" means, collectively, the respective lending commitments hereunder of Sumitomo Bank of California and Comerica Bank - California, as such commitments may be reduced or offset under this Agreement. The respective percentage obligations of each Bank with respect to the Commitment are as follows:
Bank Amount Percentage ---- ------ ---------- Sumitomo Bank of California $15,000,000 50% Comerica Bank - California $15,000,000 50%
"Default" means any Event of Default and/or any event that, with the giving of notice or passage of time or both, would be an Event of Default. "Default Rate" means the rate of interest per annum otherwise provided under this Agreement plus two percent (2%). "Designated Deposit Account" means deposit account no. 01800220570 to be maintained by Borrowers with Agent at Agent's Office, or such other deposit account as from time to time designated by Borrowers by written notification to Agent and approved by Agent. "Designated Eurodollar Market" means, with respect to any Eurodollar Loan, the London Eurodollar Market, or such other Eurodollar Market as may from time to time be designated by Agent. "dollars" or "$" means United States dollars. "EBITDA" means, for any fiscal period, for Borrowers, their Subsidiaries, Sports Connection-ES/MB, to the extent of Borrowers' interest therein, and, on a pro forma basis, any entity acquired by any of the Borrowers or any of the Subsidiaries, adjusted for verifiable cost savings acceptable to Banks: (a) the consolidated net income before extraordinary items of such Persons for that period, determined in accordance with generally accepted accounting principles, consistently applied, plus (b) consolidated interest expense for that period, plus (c) income tax expense for that fiscal period, plus (d) depreciation expense for that fiscal period plus (e) amortization expense for that fiscal period. 11 "ERISA" means the Employee Retirement Income Security Act of 1974, and any regulations issued pursuant thereto, as amended or replaced and as in effect from time to time. "Eurodollar Banking Day" means any Banking Day on which dealings in dollar deposits are conducted by and between banks in the Designated Eurodollar Market. "Eurodollar Lending Office" means as to each Bank, its office or branch so designated by written notice to Borrowers and Agent as its Eurodollar Lending Office. If no Eurodollar Lending Office separately is designated by a Bank, its Eurodollar Lending Office shall be its office as designated for purposes of notice hereunder. "Eurodollar Loan" means a Loan made hereunder and designated or redesignated as a Eurodollar Loan in accordance with Article 2. "Eurodollar Market" means a regular established market located outside the United States of America by and among banks for Eurodollar Obligations. "Eurodollar Obligations" means eurocurrency liabilities, as defined in Regulation D. "Eurodollar Period" means, as to each Eurodollar Loan, the period commencing on the date specified by Borrowers pursuant to Sections 2.1(b) or 2.5(c) and ending 30, 60 or 90 days thereafter, as specified by Borrowers in the applicable Request for Loan or Request for Redesignation of Loans, provided that: (a) The first day of any Eurodollar Period shall be a Eurodollar Banking Day; (b) Any Eurodollar Period that would otherwise end on a day that is not a Eurodollar Banking Day shall be extended to the next succeeding Eurodollar Banking Day unless such Eurodollar Banking Day falls in another calendar month, in which case such Eurodollar Period shall end on the next preceding Eurodollar Banking Day; and (c) No Eurodollar Period shall extend beyond the Maturity Date. "Eurodollar Rate" means, with respect to any Eurodollar Loan, (a) the LIBOR Rate offered for deposits as of about 10:00 a.m., Los Angeles time, two (2) Eurodollar Banking Days before the first day of the applicable Eurodollar Period in an aggregate amount approximately equal to the amount of such Eurodollar Loan and for a period of time comparable to the number of days in the applicable Eurodollar Period divided by (b) 1.00 minus the Reserve Percentage. The determination of the Eurodollar Rate by Agent shall be conclusive in the absence of manifest error. "Eurodollar Rate Spread" means, for each Eurodollar Period, the applicable additional component of interest, expressed as a percentage per annum, set forth below opposite the Applicable Pricing Level, to be added to the Eurodollar Rate in determining the applicable rate of interest for Eurodollar Loans:
Applicable Pricing Eurodollar Rate Level Spread ------------------ --------------- I 1.50% II 1.75% III 2.00%
12 "Event of Default" shall have the meaning provided in Section 9.1. "Funded Debt" means all liabilities of Borrowers and their Subsidiaries for borrowed money, including capitalized leases. "Global Collateral Documents Amendment" means that certain Global Collateral Documents Amendment, of even date herewith, by and among Agent, SCC, Inc., Sports Club, Inc. of California and the Parties to the Pledge Agreement (Partnership), substantially in the form of Exhibit A hereto. "Government Securities" means readily marketable direct obligations of the United States of America or obligations fully guarantied by the United States of America. "Governmental Agency" means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court, administrative tribunal or public utility, or (d) any arbitration tribunal or other non-governmental authority to whose jurisdiction a Person has consented. "Investment" means, when used in connection with any Person, any investment by or of that Person, whether by means of purchase or other acquisition of stock or other securities or by means of loan, advance, capital contribution, guaranty or other debt or equity participation or interest in any other Person, or otherwise, and includes, without limitation, any partnership and joint venture interests of such Person. "Issuing Bank" means, with respect to any Standby Letter of Credit, Sumitomo Bank of California or any other Bank designated by Borrowers (with the consent of the Requisite Banks) which issued that Standby Letter of Credit. "Laws" means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, regulations, ordinances, codes and administrative or judicial precedents. "LIBOR Rate" means the interest (rounded upward to the nearest 1/16th of one percent) as determined by the British Bankers Association and disseminated daily as an average of the rate at which certain major banks would offer U.S. dollar deposits for the applicable Eurodollar Period to other major banks in the London inter-bank market. "Lien" means any mortgage, deed of trust, pledge, hypothecation, security interest, encumbrance, lien or charge of any kind, whether voluntarily incurred or arising by operation of Law or otherwise, affecting any Property, including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and/or the filing of or agreement to give any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction. "Loan" or "Loans" means the advances to be made by Banks to Borrowers pursuant to this Agreement. Each individual Loan shall consist of advances made by Banks pursuant to Article 2, including advances made as new advances, and also including advances made by converting or redesignating existing advances in accordance with the provisions of Article 2. In connection with each Loan, the amount of such Loan by each Bank shall be determined according to that Bank's percentage share of the Commitment. "Loan Documents" means, collectively, this Agreement, the Global Collateral Documents Amendment, the Notes, the Pledge Agreements, the Pledge Agreement (Partnership), the Standby Letters of Credit, any assignments, any financing statements and any other certificates, documents or agreements of any type of nature heretofore or hereafter executed or delivered by Borrowers and/or any one or more of their Subsidiaries or Affiliates to Agent or to Banks in any way relating to or in furtherance of this 13 Agreement, in each case either as originally executed or as the same may from time to time be supplemented, modified, amended, restated or extended. "Maturity Date" means May 31, 2000, subject to the option of Banks, in their sole and absolute discretion, following the written request of Borrowers, to be received by Agent no later than sixty (60) days prior to each anniversary of the date of this Agreement, and subject to such terms and conditions as Bank may require, to extend the Maturity Date for an additional period of one year. "Maximum Loan Amount" means, as of any date of determination thereof, the amount of the Commitment. "Maximum Standby Letter of Credit Amount" means $8,000,000. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. "New Club Development" means the establishment de novo of a new health and fitness facility, or any other investment in a health and fitness facility that does not constitute an Acquisition, by one or more existing or future Borrowers and/or Subsidiaries. "Non-Borrower Affiliate" means any Affiliate of a Borrower, now existing or hereafter acquired, that is not a Borrower hereunder. "Note" means any of the promissory notes executed by Borrowers in favor of Banks evidencing the Loans made by Banks or any of them under the Commitment, substantially in the form of Exhibit B hereto, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. "Obligations" means all present and/or future obligations of every kind or nature of Borrowers or any Party at any time and/or from time to time owed to Agent or Banks or any one or more of them, under any one or more of the Loan Documents, whether due or to become due, matured or unmatured, liquidated or unliquidated, or contingent or noncontingent, including obligations of performance as well as obligations of payment, and including interest that accrues prior to or after the commencement of any bankruptcy or insolvency proceeding by or against any Borrower or any Party. "Opinion of Counsel" means the favorable written legal opinion of Kinsella, Boesch, Fujikawa and Towle, as counsel to Borrowers and their Subsidiaries, in a form acceptable to Agent, together with copies of all factual certificates and legal opinions upon which such counsel has relied. "Outstanding Standby Letters of Credit " means, as of any date of determination thereof, the aggregate face amount of all Standby Letters of Credit outstanding on such date, not to exceed the Maximum Standby Letter of Credit Amount. "Party" means any Person (including Borrowers and/or any Subsidiaries or Affiliates of Borrowers), other than Agent and Banks, which now or hereafter is a party to any of the Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereof established under ERISA. "Person" means any entity, whether an individual, trustee, corporation, general partnership, limited partnership, limited liability company, joint stock company, trust, unincorporated organization, bank, business association, firm, joint venture, Governmental Agency, or otherwise. 14 "Plan" means any employee benefit plan subject to ERISA and maintained by Borrowers and/or any Subsidiary thereof or to which Borrowers and/or any Subsidiary thereof are required to contribute on behalf of their employees. "Pledge Agreement" means the Pledge Agreement, dated as of February 2, 1998, executed by SCC, Inc. and Sports Club, Inc. of California in favor of Agent for the ratable benefit of Banks, as amended by the Global Documents Amendment and as such document may from time to time hereafter be supplemented, modified, amended, restated or extended. "Pledge Agreement (Partnership)" means the Pledge Agreement (Partnership), dated as of February 2, 1998 executed by certain Borrowers identified therein as the "Grantors" in favor of Agent for the ratable benefit of Banks, as amended by the Global Documents Amendment and as such document may from time to time hereafter be supplemented, modified, amended, restated or extended. "Prime Rate" means the floating commercial loan rate of Sumitomo Bank of California, announced from time to time as its "prime rate", which interest rate may not necessarily be the lowest interest rate at which Sumitomo Bank of California is willing to extend credit facilities. "Prime Rate Loan" means a Loan designated or redesignated as a Prime Rate Loan in accordance with Article 2, or converted to a Prime Rate Loan in accordance with Section 3.3(a). "Prime Rate Spread" means the additional component of interest, expressed as a percentage per annum, to be added to the Prime Rate in determining the applicable rate of interest for Prime Rate Loans. As of the date of this Agreement, the Prime Rate Spread is zero percent (0%) per annum. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Qualified Stock Repurchase" means the common stock repurchase program instituted in April, 1998; provided that the aggregate amount expended in repurchasing common stock of SCC, Inc. shall not exceed $3,750,000. "Regulations T, U and X " means Regulation T,U and X as at any time amended, of the Board of Governors of the Federal Reserve System, or any other regulation in substance substituted therefor. "Request for Standby Letter of Credit" means a written request for the issuance of a Standby Letter of Credit substantially in the form of Exhibit "C", signed by a Responsible Official of a Borrower on behalf of the Borrowers and properly completed to provide all information required to be included therein. "Request for Loan" means a written request for a Loan substantially in the form of Exhibit "D", signed by a Responsible Official of a Borrower on behalf of the Borrowers and properly completed to provide all information required to be included therein. "Request for Redesignation of Loans" means a written request for redesignation of Loans substantially in the form of Exhibit "E", signed by a Responsible Official of a Borrower on behalf of the Borrowers and properly completed to provide all information required to be included therein. "Requisite Banks" means, at any time, Banks holding at least 70% of the aggregate unpaid amount of the Loans outstanding, or, if no Loans then are outstanding, Banks having at least 70% of the aggregate Commitment then in effect. "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for eurocurrency liabilities, as defined in Regulation D, rounded upward to the nearest 1/100th of one percent. The percentage will 15 be expressed as a decimal, and will include, without limitation, marginal, emergency, supplemental, special, and other reserve percentages. "Responsible Official" means: (a) When used with reference to any Person, other than an individual, any corporate officer of such Person, general partner of such Person, corporate officer of a corporate general partner of such Person, or corporate officer of a corporate general partner of a partnership that is a general partner of such Person, or any other responsible official thereof duly acting on behalf thereof; and (b) When used with reference to a Person who is an individual, such Person. Except as otherwise specifically provided herein, any requirement that any document or certificate be signed or executed by any Person requires that such document or certificate be signed or executed by a Responsible Official of such Person, and that the Responsible Official signing or executing such document or certificate on behalf of such Person shall be authorized to do so by all necessary corporate, partnership and/or other action. "Right of Others" means, as to any Property in which a Person has an interest, any legal or equitable claim, right, title or other interest (other than a Lien) in or with respect to that Property held by any other Person, and any option or right held by any other Person to acquire any such claim, right, title or other interest, including any option or right to acquire a Lien. "SCC, Inc." means The Sports Club Company, Inc., a Delaware corporation. "Special Eurodollar Circumstance" means the application or adoption of any Law or interpretation, or any change therein or thereof, or any change in the interpretation or administration thereof by any Governmental Agency, central bank or comparable authority charged with the interpretation or administration thereof, or compliance by any Bank or its Eurodollar Lending Office with any request or directive (whether or not having the force of Law) of any such Governmental Agency, central bank or comparable authority, or the existence or occurrence of circumstances affecting the Designated Eurodollar Market generally, in each case, that is beyond the reasonable control of such Bank. "Standby Letter of Credit" means any standby letter of credit issued by the Issuing Bank pursuant to Section 2.6, in the standard form for standby letters of credit of the Issuing Bank, either as originally issued or as the same may from time to time be supplemented, modified, amended, renewed or extended. "Subsidiary" means, as of any date of determination thereof and with respect to any Person, any corporation, limited liability company, partnership or joint venture, whether now existing or hereafter organized or acquired: (a) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors or other governing body (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person, or (b) in the case of a partnership, joint venture or limited liability company, of which such Person or a Subsidiary of such Person is a general partner or joint venturer or of which a majority of the partnership or other ownership interests are at the time owned by such Person and/or one or more of its Subsidiaries. "Tangible Net Worth" means, as of any date of determination thereof, the consolidated net worth of Borrowers, excluding goodwill, patents, trademarks, trade names, organization expenses, capitalized acquisition expenses, deferred tax assets and money due from any Affiliate, officers, directors or shareholders of Borrowers or their Subsidiaries, determined in accordance with generally accepted accounting principles, consistently applied. 16 "The Sports Club/Irvine" means the athletic club owned by Irvine Sports Club, Inc. located at 1980 Main Street, Irvine, California. "The Sports Club/LA" means the athletic club owned by L.A./Irvine Sports Clubs, Ltd. located at 1835 Sepulveda Boulevard, West Los Angeles, California. "to the best knowledge of" means, when modifying a representation, warranty or other statement of any Person, that the fact or situation described therein is known by the Person (or, in the case of a Person other than a natural Person, known by a Responsible Official of that Person) making the representation, warranty or other statement, or with the exercise of reasonable due diligence under the circumstances (in accordance with the standard of what a reasonable Person in similar circumstances would have done) should have been known by the Person (or, in the case of a Person other than a natural Person, should have been known by a Responsible Official of that Person). "Total Unsubordinated Liabilities" means, as of any date of determination thereof, the sum of (a) all liabilities that should be reflected as a liability in a consolidated balance sheet of Borrowers and its Subsidiaries on such date prepared in accordance with generally accepted accounting principles, consistently applied, minus (b) subordinated debt as to which a subordination agreement acceptable to Agent has been executed and all deferred membership revenues, plus (c) the aggregate face amount of all outstanding Standby Letters of Credit and other letters of credit issued at the request of Borrowers; provided, however, that any amount described in clause (c) shall be added only to the extent that the Standby Letter of Credit or other letter of credit covers liabilities that would not be reflected in a consolidated balance sheet of Borrowers and its Subsidiaries on such date. "Total Outstanding" means, as of any date of determination thereof, the sum of (a) all outstanding Loans evidenced by the Notes on that date and (b) Outstanding Standby Letters of Credit. "type", when used with respect to any Loan, means the designation of whether such Loan is a Prime Rate Loan or a Eurodollar Loan. 1.2 Use of Defined Terms. Any defined term used in the plural shall refer to all members of the relevant class, and any defined term used in the singular shall refer to any one or more of the members of the relevant class. 1.3 Accounting Terms. All accounting terms not specifically defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, generally accepted accounting principles applied on a consistent basis, as in effect on the date hereof, except as otherwise specifically prescribed herein. 1.4 Exhibits and Schedules. All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. 17 ARTICLE 2 LOANS AND LETTERS OF CREDIT 2.1 General Provisions Regarding Loans and Borrowing Procedures. (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 $30,000,000. 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. (b) Except as otherwise provided in Section 2.5(c), each Loan shall be made pursuant to a written Request for Loan. Not later than 11:00 a.m., Los Angeles time, at least two (2) Banking Days prior to the date that a proposed Loan is to be made (unless greater notice is required by Section 2.4), Agent shall have received, at Agent's Office, a properly completed Request for Loan specifying the requested (1) date of such Loan, (2) type of Loan, (3) amount of such Loan, and (4) in the case of a Eurodollar Loan, specifying the Eurodollar Period. Agent may, in its sole and absolute discretion, permit any Request for Loan to be made by telephone or telecopier by a Responsible Official of a Borrower on behalf of Borrowers, in which case such Borrower shall confirm same by mailing or faxing a written Request for Loan to Agent within 48 hours following the Loan. If Borrowers fail to make a written Request for Loan, Borrowers hereby waive the right to dispute the amount, interest rate or term of any such Loan made upon such telephone request. (c) Promptly following receipt of a Request for Loan, Agent shall notify each Bank by telephone, telecopier or Telex of the date and type of the Loan, the applicable Eurodollar Period (in the case of a Eurodollar Loan), and that Bank's pro rata portion of the Loan. Not later than 11:00 a.m., Los Angeles time, on the date specified for any Loan, each Bank shall make its portion of the Loan in immediately available funds available to Agent at Agent's Office. Upon fulfillment of the applicable conditions set forth in Article 8, all Loans shall be credited in immediately available funds to Borrowers' Designated Deposit Account, or to such other deposit account of Borrowers with Agent as Borrowers may specify in writing to Agent. (d) Unless the Requisite Banks otherwise consent, the aggregate amount of each Eurodollar Loan shall be in an integral multiple of $250,000, and the aggregate amount of each Prime Rate Loan shall be in an integral multiple of $100,000 or the balance of the Commitment. (e) The Loans made by each Bank shall be evidenced by that Bank's Note. (f) A Request for Loan shall be irrevocable upon receipt by Agent. 2.2 Intentionally Omitted. 2.3 Prime Rate Loans. All Loans shall constitute Prime Rate Loans unless properly designated or redesignated as Eurodollar Loans pursuant to Sections 2.4 or 2.5. 2.4 Eurodollar Loans. (a) Subject to the terms and conditions set forth in this Agreement, Borrowers may, from time to time, designate all or any portion of the Loans to be Eurodollar Loans. 18 (b) Each request by Borrowers for a Eurodollar Loan shall be made pursuant to a Request for Loan received by Agent, at Agent's Office, not later than 12:00 noon, Los Angeles time, at least three (3) Eurodollar Banking Days before the first day of the applicable Eurodollar Period. (c) At or about 10:00 a.m., Los Angeles time, two (2) Eurodollar Banking Days before the first day of the applicable Eurodollar Period, Agent shall determine the applicable Eurodollar Rate (which determination shall be conclusive in the absence of manifest error) and promptly shall give notice of the same to Borrowers and the Banks by telephone or telecopier. (d) Upon fulfillment of the applicable conditions set forth in Article 8, a Eurodollar Loan shall become effective on the first day of the applicable Eurodollar Period. (e) Unless the Requisite Banks otherwise consent, no more than six (6) Eurodollar Loans, in the aggregate, shall be outstanding at any one time. (f) Nothing contained herein shall require any Bank to fund any Eurodollar Loan in the Designated Eurodollar Market. 2.5 Redesignation of Loans. (a) Subject to Section 8.2, if any Eurodollar Loan is not repaid or renewed on the last day of the applicable Eurodollar Period, such Eurodollar Loan automatically shall be redesignated as a Prime Rate Loan on such date. (b) Subject to the terms and conditions set forth in this Agreement, at any time and from time to time from the Closing Date until the thirty-third day preceding the Maturity Date, Borrowers may request that all or a portion of outstanding Prime Rate Loans be redesignated as a Eurodollar Loan or that a maturing Eurodollar Loan be redesignated as a new Eurodollar Loan, provided that no Loan redesignated as a Eurodollar Loan shall have a Eurodollar Period expiring after the Maturity Date. (c) Each redesignation of all or a portion of outstanding Prime Rate Loans or to renew a maturing Eurodollar Loan as a Eurodollar Loan shall be made pursuant to a written Request for Redesignation of Loans. Not later than 12:00 noon, Los Angeles time, at least three (3) Eurodollar Banking Days prior to the first day of the applicable Eurodollar Period, Agent shall have received, at Agent's Office, a properly completed Request for Redesignation of Loans specifying the requested (1) date of redesignation and (2) amount of Loans to be redesignated as a Eurodollar Loan, and (3) the applicable Eurodollar Period. Agent may, in its sole and absolute discretion, permit a Request for Redesignation of Loans to be made by telephone by a Responsible Official of a Borrower on behalf of the Borrowers, in which case such Borrower shall confirm same by mailing or faxing a written Request for Redesignation of Loans to Agent within 48 hours following the date of redesignation. If Borrowers fail to make a written Request for Redesignation of Loans, Borrowers hereby waive the right to dispute the amount, interest rate or term of any such Eurodollar Loan. (d) Unless the Requisite Banks otherwise consent, the amount of such Loans to be redesignated as a Eurodollar Loan shall be an integral multiple of $250,000. (e) With respect to any redesignation of a Loan as a Eurodollar Loan, at or about 10:00 a.m., Los Angeles time, three (3) Eurodollar Banking Days before the first day of the applicable Eurodollar Period, Agent shall determine the applicable Eurodollar Rate (which determination shall be conclusive in the absence of manifest error) and promptly shall give notice of the same to Borrowers and the Banks by telephone or telecopier. 19 (f) Upon fulfillment of the applicable conditions set forth in Article 8, the redesignation of all or a portion of outstanding Loans as a Eurodollar Loan shall become effective on the first day of the applicable Eurodollar Period. (g) Nothing contained herein shall require any Bank to fund any Eurodollar Loan resulting from redesignation of all or a portion of any of its Prime Rate Loans, in the Designated Eurodollar Market. (h) A request for Redesignation of Loans shall be irrevocable upon receipt by Agent. 2.6 Standby Letters of Credit. (a) Subject to the terms and conditions hereof, at any time and from time to time from the Closing Date through the Banking Day immediately preceding May 31, 2000 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 $30,000,000 and (ii) Outstanding Standby Letters of Credit shall not exceed the Maximum Standby Letter of Credit Amount. Unless 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. (b) Each Request for Standby Letter of Credit shall be submitted to the Issuing Bank not later than 11:00 a.m., Los Angeles time, at least five (5) Banking Days prior to the date upon which the requested Standby Letter of Credit is to be issued and Borrowers shall execute such documents and agreements relating to such Standby Letter of Credit as the Issuing Bank may reasonably require. Upon issuance of a Standby Letter of Credit, the Issuing Bank promptly shall notify Agent and Banks of the amount and terms thereof. The Issuing Bank shall notify Agent and Banks within ten (10) days after the end of each month of all payments, reimbursements, expirations, negotiations, transfers and other activity during that month with respect to outstanding Standby Letters of Credit. (c) Upon the issuance of a Standby Letter of Credit, each Bank shall be deemed to have purchased a pro rata participation therein from the Issuing Bank in a amount equal to that Bank's pro rata share, according to its percentage of the Commitment, of the face amount of the Standby Letter of Credit. Without limiting the scope and nature of each Bank's participation in any Standby Letter of Credit, to the extent that the Issuing Bank has not been reimbursed by Borrowers for any payment required to be made by the Issuing Bank under any Standby Letter of Credit, each Bank shall, pro rata according to its participation, reimburse the Issuing Bank promptly upon demand for the amount of such payment. The obligation of each Bank to so reimburse the Issuing Bank shall be absolute and unconditional and shall not be affected by the occurrence of any Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrowers to reimburse the Issuing Bank for the amount of any payment made by the Issuing Bank under any Standby Letter of Credit together with interest as hereinafter provided. (d) Borrowers agree to pay to the Issuing Bank, at its Office designated as the address for notices pursuant to this Agreement, or at such other payment location as the Issuing Bank shall have specified in writing to Borrowers, with respect to each Standby Letter of Credit, within one (1) Banking Day after demand therefor, a principal amount equal to any payment made by the 20 Issuing Bank under that Standby Letter of Credit, together with interest on such amount from the date of any payment made by the Issuing Bank through the date of payment by Borrowers at the rate provided for in Section 3.6. The principal amount of any such payment made by Borrowers to the Issuing Bank shall be used to reimburse the Issuing Bank for the payment made by it under the Standby Letter of Credit. Each Bank that has reimbursed the Issuing Bank pursuant to Section 2.6(c) for its pro rata share of any payment made by the Issuing Bank under a Standby Letter of Credit thereupon shall acquire a pro rata participation, to the extent of such reimbursement, in the claim of the Issuing Bank against Borrowers under this Section 2.6(d). (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 $30,000,000, 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. (f) The issuance of any supplement, modification, amendment, renewal or extension to or of any Standby Letter of Credit shall be treated in all respects the same as the issuance of a new Standby Letter of Credit. (g) The obligation of Borrowers to pay to the Issuing Bank the amount of any payment made by the Issuing Bank under any Standby Letter of Credit shall be absolute, unconditional and irrevocable. Without limiting the foregoing, such obligation of Borrowers shall not be affected by any of the following circumstances absent the Issuing Bank's gross negligence or willful misconduct: (i) any lack of validity or enforceability of the Standby Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (ii) any amendment or waiver of or any consent to departure from the Standby Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (iii) the existence of any claim, setoff, defense or other rights which Borrowers may have at any time against any Bank, any beneficiary of the Standby Letter of Credit (or any Persons or entities for whom any such beneficiary may be acting) or any other Person, whether in connection with the Standby Letter of Credit, this Agreement or any other agreement or instrument relating thereto, or any unrelated transactions; (iv) any demand, statement or any other document presented under the Standby Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) payment by the Issuing Bank under the Standby Letter of Credit against presentation of a draft or any accompanying document which does not strictly comply with the terms of the Standby Letter of Credit; (vi) the solvency (or insolvency) or financial responsibility (or lack thereof) of any party issuing any documents in connection with a Standby Letter of Credit; (vii) any error in the transmission of any message relating to a Standby Letter of Credit, or any delay or interruption in any such message not caused by the Issuing Bank; and/or 21 (viii) any error, neglect or default of any correspondent of the Issuing Bank in connection with a Standby Letter of Credit. 2.7 Agent's Right to Assume Funds Available for Advances. Unless Agent shall have been notified by any Bank at least two hours prior to the funding by Agent of any Loan that such Bank does not intend to make available to Agent such Bank's portion of the total amount of such Loan, Agent may assume that such Bank has made such amount available to Agent on the date of the Loan and Agent may, in reliance upon such assumption, make available to Borrowers a corresponding amount. If such corresponding amount is not in fact made available to Agent by such Bank, Agent shall be entitled to recover such corresponding amount on demand from such Bank, which demand shall be made in a reasonably prompt manner. If such Bank does not pay such corresponding amount forthwith upon Agent's demand therefor, Agent promptly shall notify Borrowers and Borrowers shall pay such corresponding amount to Agent. Agent also shall be entitled to recover from such Bank or Borrowers, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by Agent to Borrowers to the date such corresponding amount is recovered by Agent, at a rate per annum equal to the actual cost to Agent of funding such amount as notified by Agent to such Bank or Borrowers, as the case may be. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its share of the Commitment or to prejudice any rights which the Agent or Borrowers may have against any Bank as a result of any default by such Bank hereunder. 22 ARTICLE 3 PAYMENTS AND FEES 3.1 Principal and Interest. (a) Interest shall be payable on the outstanding daily unpaid principal amount of each Loan from the date thereof until payment in full is made and shall accrue and be payable at the rates set forth herein both before and after default and before and after maturity and judgment, with overdue amounts to bear interest at the rate set forth in Section 3.6, to the fullest extent permitted by applicable Law. Upon any partial prepayment or redesignation of outstanding Prime Rate Loans to Eurodollar Loans, interest accrued through the date of such prepayment or redesignation shall be payable on the next following interest payment date occurring pursuant to Section 3.1(b). Upon any partial prepayment or payment in full or redesignation or conversion of any Eurodollar Loan or upon any payment or redesignation in full of all outstanding Prime Rate Loans, interest accrued through the date of such prepayment, payment, redesignation or conversion shall be payable on such date. (b) Interest accrued on each Prime Rate Loan shall be payable on the first day of each month, commencing with the first such date to occur after the Closing Date. Agent shall use its best efforts to notify Borrowers of the amount of interest so payable prior to each interest payment date, but failure of Agent to do so shall not excuse payment of such interest when payable. Except as otherwise provided in Section 3.6, the unpaid principal amount of any Prime Rate Loan shall bear interest at a fluctuating rate per annum equal to the Prime Rate plus the applicable Prime Rate Spread. Each change in the interest rate shall take effect simultaneously with the corresponding change in the Prime Rate and/or the Prime Rate Spread. Each change in the Prime Rate shall be effective as of 12:01 a.m. on the Banking Day on which the change in the Prime Rate is announced, unless otherwise specified in such announcement, in which case the change shall be effective as so specified. (c) Interest accrued on each Eurodollar Loan shall be payable on the first day of each month, commencing with the first such date to occur after the Closing Date, and on the maturity date of that Eurodollar Loan. Agent shall use its best efforts to notify Borrowers of the amount of interest so payable prior to each interest payment date, but failure of Agent to do so shall not excuse payment of such interest when payable. Except as otherwise provided in Section 3.6, the unpaid principal amount of any Eurodollar Loan shall bear interest at a rate per annum equal to the Eurodollar Rate for that Eurodollar Loan plus the Eurodollar Rate Spread. (d) If not sooner paid, the principal indebtedness under this Agreement shall be payable as follows: (i) subject to the right to renew or convert a Eurodollar Rate Loan to a Prime Rate Loan, the principal amount of each Loan shall immediately be payable in Cash on the Maturity Date or, in the case of a Eurodollar Loan, on the last day of the Eurodollar Period for such Loan; and (ii) the principal indebtedness evidenced by the Notes shall be payable in Cash within two (2) Banking Days in the amount by which the aggregate outstanding amount of Loans at any time exceeds the Commitment. The outstanding principal indebtedness evidenced by the Notes shall, in any event, be payable on the Maturity Date. (e) The Notes, or any of them, may, at any time and from time to time, be paid or prepaid in whole or in part without premium or penalty, except that (i) any partial prepayment shall be an integral multiple of $100,000, (ii) Agent shall have received notice, by telephone or telecopier, of any prepayment prior to 12:00 noon on the Banking Day of such prepayment (unless greater notice is otherwise required by this Agreement), which notice shall identify the date and amount of the prepayment and the Loan(s) being prepaid, (iii) each prepayment of principal, except for partial prepayments of Prime Rate Loans, shall be accompanied by payment of interest accrued through the date 23 of payment on the amount of principal paid, (iv) except as required by subsections (d)(ii) above, no Eurodollar Loan may be paid or prepaid in whole or in part prior to the last day of the applicable Eurodollar Period without the prior consent of the Requisite Banks, and, notwithstanding such required prepayment or such consent, any payment or prepayment of all or any part of Eurodollar Loan on a day other than the last day of the applicable Eurodollar Period shall be made on a Eurodollar Banking Day, as applicable, shall be preceded by at least four (4) Eurodollar Banking Days' written notice to Agent of the date and amount of such payment or prepayment, and shall be subject to Section 3.3(c). (f) In addition to all other payments hereunder, Borrower shall make mandatory reductions of the outstanding Loans upon the receipt of, and in an amount equal to one hundred percent (100%) of, proceeds in excess of $20,000,000 from either (i) the financing or re-financing of any real property assets of Borrowers or Non-Borrower Affiliates to the extent such proceeds exceed the existing debt associated with the respective real property or (ii) a debt or equity offering; provided, however, that the terms and conditions of such financing or re-financing or debt or equity offering, including the amount and form of the proceeds thereof shall be acceptable to Agent and Requisite Banks. 3.2 Commitment Fee. On the Closing Date, Borrowers shall pay to Banks a commitment fee equal to .125% of the Commitment. Such commitment fee shall be fully earned on the Closing Date. 3.3 Eurodollar Fees and Costs. (a) If, after the date hereof, the existence or occurrence of any Special Eurodollar Circumstance shall, in the reasonable discretion of any Bank, make it unlawful, impossible or impracticable for such Bank or its Eurodollar Lending Office to make or maintain any Eurodollar Loan, or materially restrict the authority of such Bank to purchase or sell, or to take deposits of, dollars in the Designated Eurodollar Market, or to determine or charge interest rates based upon the Eurodollar Rate, then such Bank will notify Agent and such Bank's obligation to make Eurodollar Loans shall be suspended for the duration of such illegality, impossibility or impracticability and Agent forthwith shall give notice thereof to the other Banks and Borrowers. Upon receipt of such notice, the outstanding principal amount of such Bank's Eurodollar Loans, together with accrued interest thereon, automatically shall be converted to Prime Rate Loans on either (1) the last day of the Eurodollar Period(s) applicable to such Eurodollar Loans if such Bank may lawfully continue to maintain and fund such Eurodollar Loans to such day(s) or (2) immediately if such Bank may not lawfully continue to fund and maintain such Eurodollar Loans to such day(s), provided that in such event the conversion shall not be subject to payment of a prepayment fee under Section 3.3(c). In the event that such Bank is unable, for the reasons set forth above, to make, maintain or fund any Eurodollar Loan, such Bank shall fund such amount as a Prime Rate Loan, and such amount shall be treated in all respects as a Prime Rate Loan. (b) If, with respect to any proposed Eurodollar Loan: (1) Agent reasonably determines that, by reason of Special Eurodollar Circumstances, deposits in dollars (in the applicable amounts) are not being offered to each of the Banks in the Designated Eurodollar Market for the applicable Eurodollar Period; or (2) the Requisite Banks advise Agent that the Eurodollar Rate as determined by the Banks (i) does not represent the effective pricing to the Banks for deposits in dollars in the Designated Eurodollar Market in the relevant amount for the applicable Eurodollar Period, or (ii) will not adequately and fairly reflect the cost to such Banks of making the applicable Eurodollar Loans; then Agent forthwith shall give notice thereof to Borrowers and the Banks, whereupon until Agent notifies Borrowers that the circumstances giving rise to such suspension no longer exist, and the obligation of the Banks to make any future Eurodollar Loans shall be suspended. 24 (c) Upon payment or prepayment of any Eurodollar Loan, or conversion of a Eurodollar Loan to a Prime Rate Loan (other than as the result of a conversion required under Section 3.3(a)), on a day other than the last day in the applicable Eurodollar Period (whether voluntarily, involuntarily, by reason of acceleration, or otherwise), Borrowers shall pay to the Banks an amount equal to the accrued interest on the amount prepaid plus a prepayment fee equal to the amount (if any) by which: (1) the additional interest which would have been payable on the amount prepaid had it not been paid until the last day of the Eurodollar Period, exceeds (2) the interest which would have been recoverable by placing the amount prepaid on deposit in the Eurodollar market for a period starting on the date on which it was prepaid and ending on the last day of the Eurodollar Period for such portion, plus all reasonable out-of-pocket expenses incurred by Banks and reasonably attributable to such payment or prepayment; provided that no prepayment fee shall be payable (and no credit or rebate shall be required) if the product of the foregoing formula is not positive. Each Bank's determination of the amount of any prepayment fee payable under this Section 3.3(c) shall be conclusive in the absence of manifest error. (d) Borrowers hereby indemnify each Bank against, and agree to hold each Bank harmless from and reimburse each Bank on demand for, all reasonable costs, expenses, claims, penalties, liabilities, losses, legal fees and damages (including, without limitation, any interest paid by any Bank for deposits in dollars in the Designated Eurodollar Market and any loss sustained by any Bank in connection with the reemployment of funds) incurred or sustained by such Bank, as reasonably determined by such Bank, as a result of any failure of Borrowers to borrow on the date or in the amount specified in any Request for Loan or Request for Redesignation of Loans; provided that such Bank shall not be entitled to indemnification for any loss caused by its own gross negligence or willful misconduct. The determination of such amount by each Bank shall be conclusive in the absence of manifest error. (e) Any Bank requesting any payment from Borrowers under this Section 3.3, shall, at the request of Borrowers, provide reasonable detail to Borrowers regarding the manner in which the amount of any such payment has been determined. 3.4 Letter of Credit Fees. Borrowers shall pay to the Issuing Bank a letter of credit fee of 1.5% of the face amount of the Standby Letter of Credit for the term of each Standby Letter of Credit issued under Section 2.6, payable at the time of issuance. Each Standby Letter of Credit fee is earned upon issuance of each Standby Letter of Credit and is nonrefundable. The Issuing Bank promptly shall make available to Agent in immediately available funds, and Agent promptly shall make available to Banks in immediately available funds, pro rata according to their percentages of the Commitment, the portion of each Standby Letter of Credit fee which is for the account of Banks as aforesaid. 3.5 Agent Fee. From time to time hereafter, Borrowers shall pay fees to Agent as agreed between Borrowers and Agent in a separate agreement. 3.6 Late Payments/Default Rate. (a) Should any installment of principal or interest or any fee or cost or other amount payable under any Loan Document to Agent or any Bank not be paid when due, such installment shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to two percent (2.0%) above the then prevailing applicable Prime Rate based interest rate for all Loans made hereunder, to the fullest extent permitted by applicable Law. Accrued and unpaid interest on past due amounts (including, without limitation, interest on past due interest) shall be compounded monthly, on the last day of each calendar month, to the fullest extent permitted by applicable Law and payable on the first day of the following month. (b) Upon the occurrence and during the continuance of any other Event of Default, at the option of the Requisite Banks, Borrowers shall pay interest on the outstanding principal and interest at the Default Rate. This shall not constitute a waiver of any Event of Default. 25 3.7 Computation of Interest and Fees. All computations of interest and fees under any Loan Document that relate to any Prime Rate Loan or any Eurodollar Loan shall be calculated on the basis of a year of 360 days and the actual number of days elapsed. 3.8 Non-Banking Days. If any payment to be made by Borrowers or any other Party under any Loan Document shall come due on a day other than a Banking Day (and a Eurodollar Banking Day, in the case of a Eurodollar Loan), payment shall be made on the next succeeding Banking Day (and, in the case of a Eurodollar Loan, the next succeeding Eurodollar Banking Day that is also a Banking Day) and the extension of time shall be reflected in computing interest. 3.9 Manner and Treatment of Payments. (a) Borrowers agree that interest and principal payments and any fees will be deducted automatically on the due date from the Designated Deposit Account, or any other accounts of Borrowers held by Agent which contain sufficient funds. Such debits shall occur on the dates the payments become due. If the due date does not fall on a Banking Day, Agent will cause such debits to be made on the first Banking Day following the due date. Borrowers shall maintain sufficient funds in the Designated Deposit Account on the dates Agent enters debits authorized by this Agreement. If there are insufficient funds in the Designated Deposit Account or the other accounts of Borrowers on the date Agent enters any debit authorized by this Agreement, Borrowers shall immediately, after notice from Agent, pay such shortfall to Agent. The amount of all payments received by Agent for the account of each Bank shall be immediately paid by Agent to the applicable Bank in immediately available funds. All payments shall be made in lawful money of the United States of America. (b) Each Bank shall use its best efforts to keep a record of Loans made by it and payments received by it with respect to each Note and such record shall be presumptive evidence of the amounts owing. (c) Each payment or prepayment on account of any Loan shall be made and applied pro rata according to the outstanding Loans made by each Bank. (d) Each payment of any amount payable by Borrowers and/or any other Party under this Agreement and/or any other Loan Document shall be made free and clear of, and without reduction by reason of, any taxes, assessments or other charges imposed by any Governmental Agency, central bank or comparable authority. 3.10 Funding Sources. Nothing in this Agreement shall be deemed to obligate Agent or any Bank to obtain the funds for any Loan in any particular place or manner or to constitute a representation by Agent or any Bank that it has obtained or will obtain the funds for any Loan in any particular place or manner. 3.11 Failure to Charge Not Subsequent Waiver. Any decision by Agent or any Bank not to require payment of any interest (including default interest), fee, cost or other amount payable under any Loan Document on any occasion shall in no way limit or be deemed a waiver of Agent's or such Bank's right to require full payment of any interest (including default interest), fee, cost or other amount payable under any Loan Document on any other or subsequent occasion. 3.12 Agent's Right to Assume Payments Will be Made by Borrowers. Unless Agent shall have been notified by Borrowers prior to the date on which any payment to be made by Borrowers hereunder is due that Borrowers do not intend to remit such payment, Agent may, in its discretion, assume that Borrowers will make such payment when so due and Agent may, in its discretion and in reliance upon such assumption, make available to each Bank on such payment date an amount equal to such Bank's share of such assumed payment. If Borrowers do not in fact make such payment to Agent, each Bank shall forthwith on demand repay to Agent the amount of such assumed payment made available to such Bank, together with interest thereon in respect of each day from and including the date such amount was made available by Agent to such Bank to the date such amount 26 is repaid to Agent at a rate per annum equal to the actual cost to Agent of funding such amount as notified by Agent to such Bank. 3.13 Survivability. All of Borrowers' obligations under this Article 3 shall survive for one year following the date on which all Loans hereunder are fully paid. 3.14 Unused Line Fee. On the last day of each calendar quarter, commencing with the first such date to occur after the Closing Date, Borrower shall pay to Banks a fee of .25% per annum based on the difference between the Commitment and an amount equal to the weighted average Total Outstanding during the previous quarterly period or portion thereof. 27 ARTICLE 4 REPRESENTATIONS AND WARRANTIES Borrowers represent and warrant to Agent and each Bank, as of the Closing Date, that: 4.1 Existence and Qualification; Power; Compliance With Laws. (a) SCC, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of Delaware. The chief executive offices of SCC, Inc. are in Los Angeles, California. (b) The Spectrum Club Company, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (c) Pontius Realty, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (d) Sports Club, Inc. of California is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (e) Irvine Sports Club, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (f) The SportsMed Company, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (g) SCC Sports Club, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of Texas. Its chief executive offices are in Los Angeles, California. (h) L.A./Irvine Sports Clubs, Ltd. is a limited partnership duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (i) Talla New York, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of New York. Its chief executive offices are in Los Angeles, California. (j) Green Valley Spectrum Club, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of Nevada. Its chief executive offices are in Los Angeles, California. (k) Spectrum Club/Anaheim is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. Each Borrower is duly qualified or registered to transact business and is in good standing in each other jurisdiction in which the conduct of its business or the ownership or leasing of its Properties makes such qualification or registration necessary, except where the failure so to qualify or register and to be in good standing would not have a material adverse effect on the business, operations or condition (financial or otherwise) of such Borrower and its Subsidiaries, taken as a whole. Each Borrower has all requisite power and authority to conduct its business, to own and lease its Properties and to execute, deliver and perform all of its Obligations under the Loan Documents. All outstanding shares of capital stock of each Borrower, as applicable, are duly authorized, validly issued, fully paid, non-assessable and issued in compliance with all applicable state and federal securities and other Laws. Each Borrower is in compliance with all Laws and other legal requirements applicable to its business, has obtained all authorizations, consents, approvals, orders, licenses and permits from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business, except where the failure so to comply, file, register, qualify or obtain exemptions would not have a material adverse effect on the business, operations or condition (financial or otherwise) of such Borrower and its Subsidiaries, taken as a whole. 28 4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations. The execution, delivery and performance by each Borrower and its Subsidiaries of the Loan Documents to which it is a Party have been duly authorized by all necessary action, and do not and will not: (a) Except as set forth in Schedule 4.2, require any consent or approval not heretofore obtained of any partner, director, stockholder, security holder or creditor; (b) Violate or conflict with any provision of such Party's partnership agreement, certificate of limited partnership, charter, articles of incorporation or bylaws, or amendments thereto, as applicable; (c) Result in or require the creation or imposition of any Lien or Right of Others (other than as provided under the Loan Documents) upon or with respect to any Property now owned or leased or hereafter acquired by such Party; (d) Violate any provision of any Law (including, without limitation, Regulations T, U and/or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect and having applicability to such Party; or (e) Result in a breach of or constitute a default under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any other material agreement, lease or instrument to which such Party is a party or by which such Party or any of its Property is bound or affected; and no Borrower nor any Subsidiary thereof is in default under any Law, order, writ, judgment, injunction, decree, determination or award, or any indenture, agreement, lease or instrument described in this Section 4.2(e), in any respect that is materially adverse to the interests of Agent or any Bank or that would have any material adverse effect on the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole. 4.3 No Governmental Approvals Required. No authorization, consent, approval, order, license or permit from, or filing, registration or qualification with, or exemption from any of the foregoing from, any Governmental Agency is or will be required to authorize or permit under applicable Law the execution, delivery and performance by any Borrower or any Subsidiary thereof of the Loan Documents to which it is a Party. 4.4 Subsidiaries. (a) Except as described in Schedule 4.4, Borrowers do not own any capital stock, partnership interest, joint venture interest or other equity interest in any Person. Unless otherwise indicated in Schedule 4.4 all of the outstanding shares of capital stock or partnership or joint venture interests of each Borrower are owned of record and beneficially by Borrowers and all securities and interests so owned are duly authorized, validly issued, fully paid, non-assessable and issued in compliance with all applicable state and federal securities and other Laws, and are free and clear of all Liens and Rights of Others. (b) Each Subsidiary identified in Schedule 5.2 as an "Inactive Subsidiary" has (i) aggregate collections or distributions of cash from its operations of less than $50,000 and (ii) no tangible or intangible real or personal property assets having an aggregate fair market value in excess of $50,000. (c) Each Subsidiary of each Borrower is a legal entity of the form described for that Subsidiary in Schedule 4.4, duly formed, validly existing and in good standing under the Laws of its jurisdiction of formation, is duly qualified or registered to transact business and is in good standing in each other jurisdiction in which the conduct of its business or the ownership or leasing of its Properties makes such qualification or registration necessary, except where the failure so to qualify or register and to be in good standing does not have a material adverse effect on the business, operations or condition 29 (financial or otherwise) of the Borrowers and their Subsidiaries, taken as a whole, and has all requisite legal power and authority to conduct its business and to own and lease its Properties and to execute, deliver and perform all of its Obligations under the Loan Documents. (d) Each Subsidiary of each Borrower is in compliance with all Laws and other legal requirements applicable to its business, has obtained all authorizations, consents, approvals, orders, licenses and permits from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business, except where the failure to so comply, file, register, qualify or obtain exemptions would not have a material adverse effect on the business, operations or condition (financial or otherwise) of the Borrowers and their Subsidiaries, taken as a whole. 4.5 Financial Statements. Borrowers have furnished to Agent and Banks (a) the audited consolidated balance sheet of Borrowers and their Subsidiaries as at December 31, 1997, and audited consolidated income statement and cash flow statement of Borrowers and their Subsidiaries for their fiscal year then ended, and (b) the unaudited consolidated balance sheets of Borrowers and their Subsidiaries as at March 31, 1998, and unaudited consolidated income statements, cash flow statements of Borrowers and their Subsidiaries and unaudited individual Club operating statements for such month and for the portion of their fiscal year ended with such month. Such financial statements fairly present the financial condition, results of operations and cash flow of Borrowers and their Subsidiaries as at such dates and for such periods, in conformity with generally accepted accounting principles, consistently applied, provided that the balance sheets and statements referred to in (b) above are subject to normal year-end audit adjustments. 4.6 No Other Liabilities; No Material Adverse Changes. Except as set forth in Schedule 4.6 hereto, Borrowers and their Subsidiaries do not have any material liability or material contingent liability not reflected or disclosed in the financial statements or notes thereto described in Section 4.5. There has been no material adverse change in the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, since the date of the financial statements described in Section 4.5(b). 4.7 Intangible Assets. Borrowers and their Subsidiaries own, or possess the unrestricted right to use, all trademarks, trade names, copyrights, patents, patent rights, licenses and deferred tax assets that are used in the conduct of their businesses as now operated, and no such intangible asset, to the best knowledge of Borrowers, conflicts with the valid trademark, trade name, copyright, patent, patent right or deferred tax asset of any other Person to the extent that such conflict would have a material adverse effect on the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole. 4.8 Filing of Financing Statements. Upon the filing and/or recording of financing statements describing the Collateral with the Governmental Agencies listed in Schedule 4.8, and except for the requirement that continuation statements periodically be filed and/or recorded with respect thereto, and upon the taking of possession of the stock certificates of any and all Borrowers, other than SCC, Inc., all necessary steps will have been taken to fully perfect and to maintain fully perfected the Liens of Agent and Banks on the Collateral, to the fullest extent that such Liens may be perfected pursuant to Article 9 of the Uniform Commercial Code. 4.9 Public Utility Holding Company Act. No Borrower or any Subsidiary thereof is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.10 Litigation. Except for (a) the matters set forth in Schedule 4.10, (b) any matter fully covered as to subject matter and amount (subject to applicable deductibles and retentions) by insurance for which the insurance carrier has not asserted lack of subject matter coverage or reserved its right to do so, or (c) any matter, or series of related matters, involving a threatened claim against Borrowers of less than $100,000, there are no actions, suits or proceedings pending or, to the best knowledge of Borrowers, threatened against or affecting Borrowers or any of its Subsidiaries or any Property of any of them in any court of Law or before any Governmental Agency. 30 4.11 Binding Obligations. Each of the Loan Documents to which any Borrower or any Subsidiary thereof is a Party will, when executed and delivered by such Party, constitute the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms. 4.12 No Default. No event has occurred and is continuing that is a Default. 4.13 ERISA. (a) Except as disclosed in Schedule 4.13, there are no Plans. (b) With respect to each Plan: (3 such Plan complies in all material respects with ERISA and any other applicable Law; (4 such Plan has not incurred any material "accumulated funding deficiency", as that term is defined in Section 302 of ERISA; (5 no "reportable event" (as defined in Section 4043 of ERISA) has occurred that could result in the termination or disqualification of such Plan; and (6 no Borrower nor any Subsidiary thereof has engaged in any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1954, as amended). (c) no Borrower nor any Subsidiary thereof is or has been a party to any Multi employer Plan. (c) Borrowers and their Subsidiaries are in compliance with each covenant contained in Section 6.6. 4.14 Regulations T, U and X; Investment Company Act. No Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" or "margin security" within the meanings of Regulations T, U or X, respectively, of the Board of Governors of the Federal Reserve System. If requested by Agent or any Bank, Borrowers will furnish or will cause their Subsidiaries, as requested, to furnish Agent or any Bank with a statement or statements in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of said Board of Governors. No part of the proceeds of any Loan hereunder will be used to purchase or carry any such "margin security" or "margin stock" or to extend credit to others for the purpose of purchasing or carrying any such "margin security" or "margin stock" in violation of Regulations T, U or X of said Board of Governors. No Borrower nor any of its Subsidiaries is or is required to be registered under the Investment Company Act of 1940. 4.15 Disclosure. No written statement made by Borrowers or any Subsidiary thereof to Agent or any Bank in connection with this Agreement, or in connection with any Loan, or in connection with the issuance of any Standby Letter of Credit, contains any untrue statement of a material fact or omits a material fact necessary to make the statement made not misleading. To the best knowledge of Borrowers, there is no fact which Borrowers have not disclosed to Agent and Banks in writing which materially and adversely affects nor, so far as Borrowers can now foresee, is reasonably likely to prove to affect materially and adversely the business, operations, Properties, prospects, profits or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, or the ability of Borrowers and their Subsidiaries to perform their Obligations under the Loan Documents. 31 4.16 Tax Liability. Borrowers and their Subsidiaries have filed all income tax returns which are required to be filed, and have paid, or made provision for the payment of, all taxes which have become due pursuant to said returns or pursuant to any assessment received by any Borrower or any Subsidiary thereof, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. 4.17 Projections. The financial projections set forth in Schedule 4.17 are based on facts known to Borrowers and on assumptions that are reasonable and consistent with such facts. To the best knowledge of Borrowers, except as may be disclosed on Schedule 4.17, no material fact or assumption is omitted as a basis for such projections, and such projections are reasonably based on such facts and assumptions. Nothing in this Section 4.17 shall be construed as a representation that such projections in fact will be achieved. 4.18 Fiscal Year. Borrowers and their Subsidiaries each operate on a fiscal year corresponding to the calendar year and ending on December 31, the fiscal months of which correspond to the calendar months of the calendar year. 4.19 Employee Matters. There is no strike, work stoppage or labor dispute with any union or group of employees pending or overtly threatened involving Borrowers or any of their Subsidiaries. Since June 1996, there has been no increase in the salary, bonus or other compensation arrangements of the employees of Borrowers and their Subsidiaries other than normal increases in the ordinary course of business. 32 ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) So long as any Loan or any other indebtedness owing in connection therewith remains unpaid hereunder or any portion of the Commitment remains outstanding, Borrowers shall, and shall cause each of its Subsidiaries to, unless the Requisite Banks otherwise consent in writing: 5.1 Payment of Taxes and Other Potential Charges. Pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon any of them, upon their respective Property or any part thereof, upon their respective income or profits or any part thereof or upon any right or interest of Agent or any Bank under any Loan Document, except that Borrowers and their Subsidiaries shall not be required to pay or cause to be paid (a) any income or gross receipts tax generally applicable to banks or (b) any tax, assessment, charge or levy that is not yet past due, or is being contested in good faith by appropriate proceedings, so long as the relevant entity has established and maintains adequate reserves for the payment of the same and by reason of such nonpayment and contest no material item or portion of Property of Borrowers and their Subsidiaries, taken as a whole, is in jeopardy of being seized, levied upon or forfeited. 5.2 Preservation of Existence. Preserve and maintain their respective existences, except for mergers permitted in Section 6.3 of this Agreement. Preserve and maintain all material licenses, rights, franchises and privileges in the jurisdiction of their formation and all authorizations, consents, approvals, orders, licenses, permits, or exemptions from, or registrations with, any Governmental Agency that are necessary for the transaction of their respective business. Qualify and remain qualified to transact business in each jurisdiction in which such qualification is necessary in view of their respective business, except any Subsidiaries listed in Schedule 5.2 that are inactive or have immaterial assets. With respect to any Subsidiaries listed in Schedule 5.2 that are inactive or have immaterial assets, Borrowers shall immediately give Agent and Banks written notice of any change in such entities' respective existences or statuses of qualification. 5.3 Maintenance of Properties. Maintain, preserve and protect all of their respective Properties and equipment in good order and condition, subject to replacement wear and tear in the ordinary course of business, and not permit any waste of their respective Properties, except that the failure to maintain, preserve and protect a particular item of Property or equipment that is not of significant value, either intrinsically or to the operations of Borrowers and their Subsidiaries, taken as a whole, shall not constitute a violation of this covenant. 5.4 Maintenance of Insurance. Maintain liability and casualty insurance with responsible insurance companies acceptable to the Requisite Banks in such amounts and against such risks as is usually carried by responsible companies engaged in similar businesses and owning similar Properties in the general areas in which Borrowers and their Subsidiaries operate; and, as requested by the Agent, cause Agent and Banks to be designated as additional insured and loss payees with respect to such insurance, and obtain the written agreement of such insurers that such insurance shall not be canceled or terminated, nor shall the coverage or terms or exclusions thereof be materially modified, without at least thirty (30) days prior written notice to Agent. 5.5 Compliance With Laws. Comply with the requirements of all applicable Laws and orders of any Governmental Agency, noncompliance with which could materially adversely affect the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, except that Borrowers and their Subsidiaries need not comply with a requirement then being contested by any of them in good faith by appropriate proceedings so long as no interest of Agent or any Bank would be materially impaired thereby. 5.6 Additional Borrowers. In the event (i) the aggregate amount of all advances to, investments in or commitments to any Non-Borrower Affiliate by Borrowers, after the date hereof, exceeds at any time $200,000, in addition to the amounts set forth for the Non-Borrower Affiliates in Schedule 5.6, but excluding accrued management fees owing to Borrowers from such Non-Borrower Affiliates, (ii) any Non-Borrower Affiliate identified in Schedule 5.2 ceases to meet the criteria for an "Inactive Subsidiary" set forth in Section 33 4.4(b) of this Agreement, (iii) any Borrower becomes a majority shareholder or a general partner of any Non-Borrower Affiliate now or hereafter existing, or (iv) any Borrower or Borrowers, taken as a whole, obtain a majority of the partnership or other ownership interests of any Non-Borrower Affiliate, Borrowers shall cause such Non-Borrower Affiliate to become a Borrower hereunder or enter into such other agreement or arrangement with Banks concerning such Non-Borrower Affiliate as may be acceptable to the Requisite Banks in its sole discretion. In order to add a Non-Borrower Affiliate as a Borrower hereunder, the Borrowers shall deliver to Agent and Banks (a) the agreement of such Non-Borrower Affiliate to be added as a Borrower hereunder and to be bound by the terms hereof, (b) the agreement of the owners of all capital stock or other ownership interests, as applicable, of such new Borrower to become a party to the Pledge Agreement, (c) the certificates and other documents required to be delivered pursuant to the terms of the Pledge Agreement, and (d) such other documents as the Requisite Banks may reasonably require. Schedule 5.6 attached hereto sets forth as of the date hereof the amount of all advances to, investments in or commitments to any Non-Borrower Affiliate by Borrowers, the percentage ownership of each Borrower in any Non-Borrower Affiliate, and Borrowers which are general partners of any Non-Borrower Affiliate. 5.7 Inspection Rights. Upon reasonable notice by Agent or any Bank to Borrowers, at any time during regular business hours and as reasonably requested, permit Agent or any Bank, or any employee, agent or representative thereof, to examine, audit and make copies and abstracts from the records and books of account and to visit and inspect the Properties of Borrowers and their Subsidiaries and to discuss the affairs, finances and accounts of Borrowers and their Subsidiaries with any of their officers and key employees, customers or vendors, and, upon request, furnish promptly to Agent or any Bank true copies of all financial information and internal management reports made available to the senior management of Borrowers or any of their Subsidiaries. If any of Borrowers' Property, books or records are in the possession of a third party, Borrowers, upon not less than three (3) days' advance notice, hereby authorize such third party to permit Agent or Banks to have access to perform inspections or audits and to respond to Agent's or a Bank's request for information concerning such Property, books or records. If an Event of Default has occurred and is continuing, no advance notice of any audits and inspections shall be required. 5.8 Keeping of Records and Books of Account. Keep adequate records and books of account reflecting all financial transactions in conformity with generally accepted accounting principles, consistently applied, and in material conformity with all applicable requirements of any Governmental Agency having regulatory jurisdiction over Borrowers or any of their Subsidiaries. 5.9 Compliance With Agreements, Duties and Obligations. Promptly and fully comply with all their respective agreements, duties and obligations under the Loan Documents, and with material terms of any other material agreements, indentures, leases and/or instruments to which any one or more of them is a party, whether such other agreements, indentures, leases and/or instruments are with Agent and any Bank or another Person. 5.10 Use of Proceeds. Use the proceeds of the Loans for the following purposes only: (i) for working capital purposes; (ii) for Capital Expenditures; (iii) for Standby Letters of Credit; (iv) to fund non-hostile Acquisitions; and (v) to fund New Club Developments. 34 ARTICLE 6 NEGATIVE COVENANTS So long as any Loan or other indebtedness owing in connection therewith remains unpaid hereunder or any portion of the Commitment remains outstanding, Borrowers shall not (and shall cause each of their Subsidiaries to not) unless the Requisite Banks otherwise consent in writing: 6.1 Disposition of Property. Sell, assign, exchange, transfer, lease or otherwise dispose of, or contract to sell, assign, exchange, transfer, lease or otherwise dispose of, any of their respective Properties, whether now owned or hereafter acquired, and whether to an Affiliate or otherwise, except (a) Properties sold, assigned, exchanged, transferred, leased or otherwise disposed of in the ordinary course of business, and (b) as permitted under Section 6.3. 6.2 Transactions with Borrowers and Non-Borrower Affiliates. Advance funds to, guarantee obligations of, or make any other investments in or commitments or make distributions to any Non-Borrower Affiliate unless (a) such Non-Borrower Affiliate is made a Borrower under this Agreement or some other arrangement acceptable to the Requisite Banks in their sole discretion is made in accordance with Section 5.6, or (b) the aggregate amount of all advances to, guaranties of, investments in and commitments to all Non-Borrower Affiliates does not exceed $200,000, in addition to the amounts set forth for the Non-Borrower Affiliates in Schedule 5.6, but excluding accrued management fees owing to Borrowers from such Non-Borrower Affiliates, Borrowers shall provide Agent and Banks a monthly report detailing such transactions, such report to be in a form as is acceptable to Agent and Requisite Banks. The Borrowers shall have the right, with the consent of the Requisite Banks, not to be unreasonably withheld but subject to such terms and conditions as the Requisite Banks may require, to add any Non-Borrower Affiliate as a Borrower hereunder. 6.3 Mergers, Acquisitions and New Club Developments. (a) Merge, consolidate or amalgamate with or into any Person, except mergers, consolidations or amalgamations of a Subsidiary of a Borrower into a Borrower (with such Borrower as the surviving entity) prior notice of the details of which shall have been given to Agent and Banks, or mergers, consolidations or amalgamations in connection with an Acquisition or New Club Development permitted pursuant to Section 6.3(b) or 6.3(c). (b) Make any Acquisition or enter into any agreement to make any Acquisition, provided that the consent of the Requisite Banks shall not be required in connection with any Acquisition satisfying the following conditions: (i) such Acquisition requires payment of an amount of less than either (A) $10,000,000 of total consideration in connection with such Acquisition alone or (B) $15,000,000 of total consideration when such Acquisition is combined with all other Acquisitions made by Borrowers during the twelve months prior to such Acquisition, excluding Borrowers' investment in the Vertical Club and Borrowers' investment in any Acquisition previously approved by the Requisite Banks, (ii) such Acquisition is not for a sum greater than seven and one-half times the EBITDA of the acquired entity, with adjustments acceptable to Banks for identifiable savings which will occur as a result of such Acquisition, or (iii) such Acquisition is not of an entity engaged in a business different from that of Borrowers. In connection with an Acquisition meeting the above requirements, the Borrowers may enter into a partnership or a corporate or other joint venture with one or more unaffiliated Persons. (c) Pursue any New Club Development, provided that the consent of the Requisite Banks shall not be required for a New Club Development satisfying the following conditions: (i) such New Club Development is projected to generate positive EBITDA for the twelve-month period commencing on the first anniversary following completion of such New Club Development; and (ii) Borrowers do not expend more than $5,000,000 on such New Club Development alone or more than $10,000,000 when the expenditures for such New Club Development are combined with all other New Club Development expenditures during the twelve months prior to the commencement of such New Club Development, exclusive of expenditures in connection with existing development projects already approved by Banks, including those development projects described on Schedule 6.3(c). 35 (d) In any event, no more than three mergers, Acquisitions or New Club Developments in the "pre sale phase of development" shall be pursued at any given time. "Pre sale phase of development" shall mean the period during which memberships in the new Clubs are offered for sale prior to the date the Club opens for business. (e) Prior to any Acquisition, Borrowers shall deliver to Agent and Banks (i) an executive summary of the Acquisition in form and substance acceptable to Agent and Banks, (ii) a multi-year financial forecast, including assumptions, (iii) a pro forma financial statement giving effect to the proposed Acquisition, (iv) a pro forma compliance certificate executed by a Responsible Official of a Borrower certifying that giving effect to the proposed Acquisition, Borrowers shall be in compliance with the terms of this Section 6.3 and all other terms and financial covenants set forth in this Agreement, (v) a schedule of sources and uses of funds, and (vi) such other details about such Acquisition as Agent or any Bank may reasonably request. Prior approval by the Requisite Banks shall be required for every Acquisition other than those permitted under Section 6.3(b) above. (f) Prior to any New Club Development, Borrowers shall deliver to Agent and Banks (i) an executive summary detailing the development project, demographic and site analysis, cost estimates and financing sources, (ii) a multi-year financial forecast, including assumptions, demonstrating positive projected EBITDA for the twelve-month period commencing on the first anniversary following completion of such New Club Development, (iii) a pro forma compliance certificate executed by a Responsible Officer of a Borrower certifying that giving effect to the proposed development, Borrowers shall be in compliance with the terms of this Section 6.3 and all other terms and financial covenants set forth in this Agreement, and (iv) such other details about such development as Agent or any Bank may reasonably request. Prior approval by the Requisite Banks shall be required for every New Club Development other than those permitted under Section 6.3(c) above. (g) Banks acknowledge prior receipt of a request from Borrowers for funding an amount not to exceed $10,000,000 in connection with the purchase of land and a building by The Spectrum Club Company, Inc. and its development as a new Spectrum Club in Thousand Oaks, California (the "Thousand Oaks Club"). Funding for the Thousand Oaks Club New Club Development has been approved subject to the following: (i) the occurrence of no material adverse change with respect to Borrowers or the proposed Acquisition and no Default having occurred prior to such funding or which would occur as a result of such funding; and (ii) such other evidence of full compliance with all other terms and conditions of this Agreement as Agent or any Bank shall reasonably request both before and after such Acquisition. (h) Concurrent with the execution and delivery of this Agreement, Banks acknowledge receipt of a request from Borrowers to permit Borrowers to make a net investment not to exceed $24,000,000 for the Acquisition and development of the Vertical Club in New York City. In connection with such request, Borrowers have provided Banks with the information package attached hereto as Exhibit F (the "Vertical Club Materials"). Banks have approved Borrowers' Acquisition and development of the Vertical Club subject to the following: (i) the occurrence of no material adverse change with respect to Borrowers or the proposed Acquisition and development from the information reflected in the Vertical Club Materials, and no Default having occurred prior to such funding or which would occur as a result of such funding; (ii) Borrowers' adherence to the budgets and time lines provided in the Vertical Club Materials, as such budgets and time lines may be refined in the quarterly project development status reports delivered by Borrowers to Agent pursuant to Section 7.1(n) hereof, with material modifications approved by Banks; and 36 (iii) such other evidence of full compliance with all other terms and conditions of this Agreement as Agent or any Bank shall reasonably request both before and after such Acquisition. (i) Concurrent with the execution and delivery of this Agreement, Banks acknowledge receipt of a request from Borrowers to permit Borrowers to make a net investment not to exceed $20,800,00 for a New Club Development of a Sports Club in Houston (the "Houston Sports Club"). In connection with such request, Borrowers have provided Banks with the information package attached hereto as Exhibit G (the "Houston Sports Club Materials"). Banks have approved Borrowers' development of the Houston Sports Club subject to the following: (A) the occurrence of no material change with respect to Borrowers or the proposed development from the information reflected in the Houston Sports Club Materials, and no default having occurred prior to such funding or which would occur as a result of such funding; (B) Borrowers' adherence to the budgets and time lines provided in the Houston Sports Club Materials, as such budgets and time lines may be refined in the quarterly project development status reports delivered by Borrower to Agent pursuant to Section 7.1(n) hereof, with material modifications approved by Banks; and (C) such other evidence of full compliance with all other terms and conditions of this Agreement as Agent or any Bank shall reasonably request both before and after such development. (j) Notwithstanding the right of Borrowers' pursuant to Section 6.3(b) and (c) above to make certain Acquisitions or pursue certain New Club Developments without obtaining the prior consent of the Requisite Banks, Borrowers shall notify Agent of, or submit to Agent a formal request for approval of, as applicable, any and all intended Acquisitions or New Club Developments prior to entering into a definitive purchase agreement, in the case of any intended Acquisition, or, in the case of any intended New Club Development, upon the earlier of (i) the approval of such New Club Development by the Board of Directors of the applicable Borrower or (ii) the applicable Borrower's execution of any contract or expenditure of any money which would financially obligate such Borrower to proceed with such New Club Development. 6.4 Profitability. Fail to maintain on a combined basis a positive net income after taxes and extraordinary items on a quarterly basis except as a result of Borrowers' payment of the prepayment penalty in connection with the prepayment of their financing obligations to AT&T Commercial Finance Corporation. 6.5 Redemption, Dividends and Distributions; Payments to Partners. Redeem or repurchase stock or partnership interests, declare or pay any dividends or make any other distribution, whether of capital, income or otherwise, and whether in Cash or other Property, except that, subject to applicable statutory restrictions and provided no Event of Default exists or would exist after such action, (a) any Borrower or Subsidiary of a Borrower may, subject to Section 6.2, declare and pay dividends or make distributions directly or indirectly to another Borrower, (b) SCC, Inc. may make a Qualified Stock Repurchase, (c) Borrowers and Subsidiaries may, subject to Section 6.2, pay partner distributions as required under the partnership agreements as currently in effect as of the date hereof, or with such amendments as are approved in writing by the Requisite Banks, of L.A./Irvine Sports Clubs, Ltd., El Segundo TDC, Ltd., Sports Connection-ES/MB and Reebok-Sports Club/NY or any other entity approved in writing by the Requisite Banks pursuant to Section 5.6 of this Agreement, (d) Borrowers and Subsidiaries may declare or make operating distributions or declare or pay dividends or make distributions in connection with the purchase of partnership interests in L.A./Irvine Sports Clubs, Ltd., El Segundo TDC, Ltd., Sports Connection-ES/MB and/or Reebok-Sports Club/NY or any other entity approved in writing by the Requisite Banks pursuant to Sections 5.6 and 6.2 of this Agreement, and (e) The SportsMed Company, Inc. and/or HFA Services, Inc. shall have the right to repurchase securities pursuant to the terms of the Shareholders Agreements previously entered into by HFA Services, Inc., copies of which Shareholders Agreements have been delivered to Banks, as such Shareholders Agreements are currently in effect as of the date hereof, or with such amendments as are approved in writing by the Requisite Banks, provided that 37 The SportsMed Company, Inc. and/or HFA Services, Inc. shall not expend more than $750,000 in the aggregate during the term of this Agreement in connection with such repurchases of securities. 6.6 ERISA. (a) At any time, maintain, or be or become obligated to contribute on behalf of its employees to, any Plan, other than those Plans disclosed in Schedule 4.13. (b) At any time, permit any Plan to: (7 engage in any "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended; (8 incur any material "accumulated funding deficiency", as that term is defined in Section 302 of ERISA; or (9 terminate in a manner which could result in liability of Borrowers or any Subsidiary thereof to the Plan or to the PBGC or the imposition of a Lien on the Property of Borrowers or any Subsidiary thereof pursuant to Section 4068 of ERISA. (c) At any time, assume any obligation to contribute to any Multiemployer Plan, nor shall Borrowers or any Subsidiary thereof acquire any Person or assets of any Person which has, or has had at any time from and after January 2, 1974, an obligation to contribute to any Multiemployer Plan. (d) Fail immediately to notify Agent and Banks of the occurrence of any "reportable event" (as defined in Section 4043 of ERISA) or of any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1954, as amended) with respect to any Plan or any trust created thereunder. Upon request by Agent or any Bank, Borrowers promptly shall furnish to Agent and Banks copies of any reports or other documents filed by Borrowers or any Subsidiary thereof with the United States Secretary of Labor, the PBGC and/or the Internal Revenue Service, with respect to any Plan. (e) At any time, permit any Plan to fail to comply with ERISA or other applicable Law in any material respect. 6.7 Change in Nature of Business/Management. Make any material change in the nature of the business of Borrowers and their Subsidiaries, as conducted and presently proposed to be conducted, or remove or allow removal of D. Michael Talla, John Gibbons or Timothy O'Brien from any management position presently held by him, unless evidence of satisfactory progress to procure a replacement acceptable to the Requisite Banks is delivered to Agent and Banks within 30 days thereafter. 6.8 Intentionally Omitted. 6.9 Indebtedness, Guaranties and Liens. Create, incur, assume or suffer to exist any Lien of any nature upon or with respect to any of their respective Properties, whether now owned or hereafter acquired; create, incur or assume any indebtedness for borrowed money or in connection with the purchase of Property or any liability to the issuer of any letter of credit; guaranty or otherwise become responsible (including, but not limited to, any agreement to purchase any obligations, stock, Property, goods or services or to supply or advance any funds, Property, goods or services) for the indebtedness or obligations of any other Person; or incur any lease obligation that is required to be capitalized under generally accepted accounting principles, except: (a) Indebtedness and Liens securing obligations incurred in the ordinary course of business and incurred in connection with purchase money transactions including real estate or equipment or fixture purchases, provided that the amount of such transactions involving purchases of new equipment for existing Clubs (i.e., other than in connection with Acquisitions or New Club 38 Developments, as permitted by Section 6.12) shall not exceed an aggregate amount of $1,500,000 principal (or the equivalent thereof) in any one fiscal year; (b) Intentionally omitted; (c) Intentionally omitted; (d) Liens securing the claims or demands of materialmen, mechanics, and other like Persons not yet delinquent or being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (e) Indebtedness, liabilities, guaranties or Liens in favor of Agent and Banks under this Agreement, the Notes and the other Loan Documents; (f) Indebtedness and Liens listed on Schedule 6.9 or Indebtedness and Liens arising out of the extension or refinancing of the obligations of Borrowers described on Schedule 6.9, provided that such obligations are not increased and are not secured by any additional property; (g) Guaranties arising from endorsement, in the ordinary course of collection, of negotiable instruments; (h) Indebtedness and Liens for taxes and assessments or other government charges or levies if not yet due and payable or, if due and payable, which are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (i) Liens under workers' compensation, unemployment insurance, social security, or similar legislation, if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; and (j) Trade credit for goods and services provided to the Borrowers and the Subsidiaries in the ordinary course of business. 6.10 Transactions with Affiliates. Enter into any transaction of any kind with any Affiliate of Borrowers other than (a) transactions between or among Borrowers and their Subsidiaries so long as, as a result of such transactions, the aggregate amount advanced to, invested in or committed to any Non-Borrower Affiliate on or after January 1, 1997, does not exceed $200,000, (b) arms-length transactions with Affiliates which are permitted with non-Affiliates pursuant to Sections 6.1, 6.3, 6.5, and (c) those transactions listed in Schedules 6.10 and 6.17. 6.11 Change in Fiscal Year. Change its fiscal year, or the fiscal months thereof. 6.12 Capital Expenditures and Purchase Money Transactions. Make or incur obligations for Capital Expenditures in the aggregate for Borrowers and their Subsidiaries in excess of $10,000,000 during the Borrowers' 1998 fiscal year or, in any subsequent fiscal year, in excess of five percent (5.0%) of Borrowers' net revenues derived from operation of the Clubs for such fiscal year before restatements for acquisitions accounted for using the pooling method of accounting. For the purpose of determining compliance by Borrowers and their Subsidiaries with the foregoing covenant, the following Capital Expenditures and indebtedness and Liens securing obligations incurred in connection with purchase money equipment financings ("Purchase Money Indebtedness and Liens") shall be excluded: (i) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than one year following the consummation of, an Acquisition for which the consent of Banks is not required pursuant to Section 6.3(b), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other 39 expenditures relating to such Acquisition do not exceed the respective limits on total consideration for such Acquisition set forth in Section 6.3(b); (ii) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than one year following the consummation of, an Acquisition for which the consent of Banks is required pursuant to Section 6.3(b), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such Acquisition do not exceed the total consideration limit imposed for such Acquisition by Banks in issuing their approval of such Acquisition; (iii) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than 90 days following the opening of the related new Club, a New Club Development for which the consent of Banks is not required pursuant to Section 6.3(c), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such New Club Development do not exceed the respective limits on total consideration for such New Club Development set forth in Section 6.3(c); and (iv) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than 90 days following the opening of the related new Club, a New Club Development for which the consent of Banks is required pursuant to Section 6.3(c), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such New Club Development do not exceed the total consideration limit imposed by Banks in issuing their approval of such New Club Development. 6.13 Tangible Net Worth. Permit Tangible Net Worth, as of the last day of any fiscal quarter of Borrowers and their Subsidiaries ending during any period specified below, to be less than $77,000,000 plus 80% of Borrowers' cumulative net income after December 31, 1997 not reduced by net losses and increased by one hundred percent (100%) of funds generated from any equity offering occurring after May 31, 1998. 6.14 Ratio of Total Unsubordinated Liabilities to Tangible Net Worth. Permit the ratio of Total Unsubordinated Liabilities to Tangible Net Worth, as of the last day of any fiscal quarter of Borrowers and their Subsidiaries to be greater than 1.25:1.00. 6.15 Debt Service Coverage Ratio. For Borrowers and their Subsidiaries, permit the ratio of (i) EBITDA to (ii) interest expense on all indebtedness plus the current portion of long term debt of Borrowers to be less than 2.00:1.00, with such ratio to be calculated at the end of each fiscal quarter (x) on a cumulative annualized basis for each fiscal quarter beginning with the second quarter of Borrowers' and their Subsidiaries' 1998 fiscal year and continuing through and including the fourth quarter of Borrowers' and their Subsidiaries' 1998 fiscal year, and (y) on a rolling four-quarter basis for each fiscal quarter ending after the fourth quarter of Borrowers' and their Subsidiaries 1998 fiscal year. For the purpose of calculation only, the $4,000,000 balloon payment due November 1999 under the Sports Club/Irvine note shall be excluded. 6.16 Intentionally Omitted. 6.17 Loans to Officers. Make any loans, advances or other extensions of credit to any of Borrowers' executives, officers, directors, shareholders or employees (or any relatives of any of the foregoing) in an aggregate amount exceeding $200,000, other than those set forth on Schedule 6.17. 6.18 Deposit Accounts. Establish any deposit accounts in the name of any Borrower or any Subsidiary without prior notice to Agent. 6.19 Ratio of Funded Debt to EBITDA. Permit the ratio of (i) Funded Debt to (ii) EBITDA, as of the last day of the fiscal quarter of Borrowers and their Subsidiaries, calculated at the end of each such quarter on a rolling four (4) quarter basis, to be greater than 3.75:1.00. 40 ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS 7.1 Financial and Business Information. So long as any Loan remains unpaid, or any other Obligation remains unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrowers shall, in addition to complying with the requirements of Section 8.3 of this Agreement, and unless the Requisite Banks otherwise consent in writing, deliver to Agent, at Borrowers' sole expense: (a) As soon as practicable, and in any event within 30 days after the end of each fiscal month of Borrowers, (i) consolidated balance sheets of Borrowers and their Subsidiaries as at the end of such month, setting forth in comparative form the corresponding figures as at the end of the corresponding month of their preceding fiscal year, (ii) Club operating statements of each Club as at the end of such month, (iii) consolidated income statements of Borrowers and their Subsidiaries for such month and for the portion of their fiscal year ended with such month, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year and (iv) consolidated cash flow statements of Borrowers and their Subsidiaries for the portion of their fiscal year ended with such month, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year, all in reasonable detail. The preceding financial statements shall be certified by a Responsible Official of a Borrower as fairly presenting the financial condition, results of operations and cash flow of Borrowers and their Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at such date and for such periods, subject only to normal year-end audit adjustments. (b) As soon as practicable, and in any event within 45 days after the end of each quarter of Borrowers (including the last quarter of each fiscal year, provided that with respect to such last quarter the financial statements required hereby may be in preliminary form, prior to year-end audit adjustments), (i) consolidated balance sheets of Borrowers and their Subsidiaries as at the end of such quarter, setting forth in comparative form the corresponding figures as at the end of the corresponding quarter of their preceding fiscal year, (ii) consolidated income statements of Borrowers and their Subsidiaries for such quarter and for the portion of their fiscal year ended with such quarter, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year and (iii) consolidated cash flow statements of Borrowers and their Subsidiaries for the portion of their fiscal year ended with such quarter, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year, all in reasonable detail. The preceding financial statements shall be certified by a Responsible Official of a Borrower as fairly presenting the financial condition, results of operations and cash flow of Borrowers and their Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at such date and for such periods, subject only to normal year-end audit adjustments. (c) As soon as practicable, and in any event within 90 days after the close of each fiscal year of Borrowers, (i) consolidated balance sheets of Borrowers and their Subsidiaries as at the end of such fiscal year, setting forth in comparative form the corresponding figures as at the end of their preceding fiscal year, and (ii) consolidated income statements and cash flow statements of Borrowers and their Subsidiaries for such fiscal year, setting forth in comparative form the corresponding figures for their previous fiscal year, all in reasonable detail. Such balance sheets and statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, and such consolidated balance sheet and consolidated statements shall be accompanied by a report and unqualified opinion of independent public accountants of recognized standing selected by Borrowers and reasonably satisfactory to the Requisite Banks, which report and opinion shall be prepared in accordance with generally accepted auditing principles as at such date, and shall be subject only to such qualifications and exceptions as are acceptable to the Requisite Banks in the exercise of their reasonable discretion. (d) As soon as practicable, and in any event within 30 days after the end of each month of Borrowers, a Certificate of a Responsible Official of a Borrower setting forth a schedule of 41 Capital Expenditures made by Borrowers and/or their Subsidiaries during such month, and during their fiscal year to date, separately for each Club. (e) As soon as practicable, and in any event within 30 days after the start of each fiscal year of Borrowers, a monthly budget for the then started fiscal year including, without limiting the generality of the foregoing, monthly projected consolidated balance sheets, income statements and cash flow statements of Borrowers and their Subsidiaries and individual Club operating statements, all in reasonable detail. (f) Within 30 days following the end of each month, a membership information report for each Club and in the aggregate in the form now prepared by Borrowers on a monthly basis, reflecting no less than the immediately preceding consecutive six months, and reflecting the number of members, the number of new memberships sold and the gross reduction in number of memberships, and supplemented by such additional information as Agent may request. (g) Within 30 days after the close of each fiscal year of Borrowers, Borrowers' budget of capital expenditures for capital improvements, replacements and other related purposes for the following fiscal year. (h) Within the earlier of 5 days after (i) the same are filed with the Securities and Exchange Commission ("SEC") or (ii) the same are required to be filed with the SEC, subject to allowable SEC extensions, copies of each annual report, proxy or financial statement or other report or communication sent to the shareholders of Borrowers, and copies of all annual, regular, periodic and special reports and registration statements which Borrowers may file or be required to file with the Securities and Exchange Commission or any similar or corresponding Governmental Agency or with any securities exchange. (i) Within 5 days after receipt of copies of all correspondence and notices received by Borrowers from the Internal Revenue Service ("IRS") relating to any adverse action or determination by the IRS in respect of any Borrower's tax status under the Internal Revenue Code. (j) Immediately upon becoming aware of the existence of any condition or event which constitutes a Default, a written notice specifying the nature and period of existence thereof and what action Borrowers or their Subsidiaries are taking or propose to take with respect thereto. (k) Promptly upon request by Agent or the Requisite Banks, copies of any detailed audit reports submitted to Borrowers or any of their Subsidiaries by independent accountants in connection with the accounts or books of Borrowers or any of their Subsidiaries, or any audit of any of them. (l) Promptly after request by Agent or the Requisite Banks, copies of any report or other document filed by Borrowers or any of their Subsidiaries with any Governmental Agency. (m) Promptly upon becoming aware that any Person asserts a claim against Borrowers or any of their Subsidiaries in excess of $500,000 and that such Person has given notice or taken any other action with respect to a claimed default or event of default, a written notice specifying the notice given or action taken by such Person and the nature of the claimed default or event of default and what action Borrowers or their Subsidiaries are taking or propose to take with respect thereto. (n) As soon as practicable, and in any event within 45 days after the end of each fiscal quarter of Borrowers, a project development status report in form and substance acceptable to Agent and Banks, which shall include, at a minimum, a timetable for architectural and construction design, permitting, construction milestones, as may be available, as well as an estimated date for completion. Such report also shall include the budget as originally approved by the Board of Directors 42 of the applicable Borrower or Subsidiary and by Banks, as well as any material modifications that have been approved by Banks or which may require such approval. (o) Such other data and information as from time to time may be reasonably requested by Agent or the Requisite Banks. 7.2 Compliance Certificates. So long as any Loan remains unpaid, or any other Obligation remains unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrowers shall, unless the Requisite Banks otherwise consent in writing, deliver to Agent, at Borrowers' sole expense, not later than 45 days after the end of each fiscal quarter of Borrower, a Certificate of a Responsible Official of a Borrower (a) setting forth computations showing, in detail satisfactory to the Requisite Banks, whether Borrowers and their Subsidiaries were in compliance with their obligations pursuant to Sections 6.11 through 6.16, inclusive; (b) setting forth computations showing, in detail satisfactory to the Requisite Banks, the Applicable Pricing Level; (c) stating that a review of the activities of Borrowers and their Subsidiaries during such fiscal period has been made under supervision of the certifying Responsible Official with a view to determining whether during such fiscal period Borrowers and their Subsidiaries performed and observed all their respective Obligations under the Loan Documents, and either (i) stating that, to the best knowledge of the certifying Responsible Official, during such fiscal period, Borrowers and their Subsidiaries performed and observed each covenant and condition of the Loan Documents applicable to them, or (ii) if Borrowers and their Subsidiaries have not performed and observed such covenants and conditions, specifying all such Defaults and their nature and status; and (d) stating that the Properties of Borrowers and their Subsidiaries are being maintained and are in reasonable working order and condition, ordinary replacement wear and tear excepted. 7.3 Revisions or Updates to Schedules. Should any of the information or disclosures provided on any of the Schedules originally attached hereto become outdated or incorrect in any material respect, upon request by Agent, Borrowers promptly shall provide to Agent such revisions or updates to such Schedule(s) as may be necessary or appropriate to update or correct such Schedule(s); provided that no such revisions or updates to any Schedule(s) shall be deemed to have amended, modified or superseded such Schedule(s) as originally attached hereto, or to have cured any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule(s), unless and until the Requisite Banks, in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule(s). 43 ARTICLE 8 CONDITIONS 8.1 Initial Loans, Etc. The obligation of each Bank to make the initial Loans and to issue the initial Standby Letter of Credit, each are subject to the following conditions precedent (in addition to any applicable conditions precedent set forth elsewhere in this Article 8), each of which shall be satisfied prior to or concurrently with the making of the initial Loans and the issuance of the initial Standby Letter of Credit (unless Banks, in their sole and absolute discretion, shall agree otherwise): (a) Agent shall have received all of the following, each of which shall be originals unless otherwise specified, each properly executed by a Responsible Official of each party thereto, each dated as of the Closing Date and each in form and substance satisfactory to Agent and its legal counsel (unless otherwise specified or, in the case of the date of any of the following, unless Agent otherwise agrees or directs): (10) six executed counterparts of this Agreement; (11) the Notes executed by Borrowers payable to the order of Banks; (12) with respect to each Borrower and any and each Subsidiary thereof, such documentation as Agent may require to establish the due organization, valid existence and good standing of such Borrower and each such Subsidiary, its qualification to engage in business in each jurisdiction in which it is engaged in business or required to be so qualified, its authority to execute, deliver and perform any Loan Documents to which it is a Party, and the identity, authority and capacity of each Responsible Official thereof authorized to act on its behalf, including, without limitation, certified copies of articles of incorporation and amendments thereto, bylaws and amendments thereto, partnership agreements, certificates of limited partnerships, certificates of good standing and/or qualification to engage in business, certificates of corporate resolutions, incumbency certificates, Certificates of Responsible Officials, and the like; (13) such Loan Documents as Agent or Requisite Banks may require pledging Property of Borrowers and/or any of their Subsidiaries, together with such related financing statements or other documents as Agent or Requisite Banks may request to perfect, effect, facilitate, consent to, give notice of or otherwise evidence any Liens created thereby; (14) the Global Collateral Documents Amendment; (15) the Opinion of Counsel; (16) a Certificate of a Responsible Official of Borrowers certifying that the conditions specified in Sections 8.1(c) and 8.1(d) have been satisfied; (17) evidence that all Liens or Rights of Others on or in the Property of Borrowers and/or their Subsidiaries (other than such Liens and Rights of Others as are permitted by Section 6.8) have been terminated or discharged; and (18) such other certificates, documents, consents or opinions as Agent or Requisite Banks reasonably may require. (b) Duly executed financing statements with respect to the Collateral shall have been filed and/or recorded with such Governmental Agencies, and in such jurisdictions and locales, as Agent or Requisite Banks may specify. 44 (c) The representations and warranties of Borrowers contained in Article 4 shall be true and correct as of the date made or reaffirmed. (d) Borrowers and their Subsidiaries and any other Parties shall be in compliance with all the terms and provisions of the Loan Documents, and no Default shall have occurred and be continuing. (e) The fees referred to in Sections 3.2 and 3.5 have been paid to Banks and/or Agent, as applicable. 8.2 Any Loan. In addition to any applicable conditions precedent set forth elsewhere in this Article 8, the obligation of Banks to make any Loan, to redesignate any Loan, and issue any Standby Letter of Credit are subject to the following conditions precedent: (a) except (i) for representations and warranties which speak as of a particular date or are no longer true and correct as a result of a change which is permitted by this Agreement or (ii) as disclosed by Borrowers and approved in writing by the Requisite Banks, the representations and warranties contained in Article 4 shall be true and correct on and as of the date of the Loan or redesignation or issuance or creation, as the case may be, as though made on and as of that date; (b) except for (i) the matters set forth in Schedule 4.10, (ii) any matter fully covered as to subject matter and amount (subject to applicable deductibles and retentions) by insurance for which the insurance carrier has not asserted lack of subject matter coverage or reserved its right to do so, or (iii) any matter, or series of related matters, involving a claim against Borrowers of less than $100,000, there shall be no actions, suits or proceedings pending against or affecting Borrowers or any of their Subsidiaries or any Property of any of them in any court of Law or before any Governmental Agency which might reasonably be expected to have a material adverse effect on the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole; (c) no material adverse change shall have occurred in the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, since the Closing Date; (d) no Default shall have occurred and be continuing; (e) Agent shall have timely received a properly completed Request for Loan, Request for Redesignation of Loans or Request for Standby Letter of Credit, as the case may be, in compliance with all applicable provisions of Article 2; and Agent shall have received, dated as of the date of the Loan or redesignation or issuance or creation, as the case may be, a Certificate of a Responsible Official of a Borrower to the effect that all of the above conditions have been satisfied, with any changes or exceptions thereto being described in a schedule attached to such certificate and with such changes or exceptions being subject to the approval of the Requisite Banks; and (f) Agent shall have received, in form and substance satisfactory to the Requisite Banks such other certificates, documents or consents as the Requisite Banks reasonably may require. 45 ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT 9.1 Events of Default. The existence or occurrence of any one or more of the following events, whatever the reason therefor, shall constitute an Event of Default: (a) Borrowers fail to pay any installment of principal or interest on any indebtedness on any of the Notes or any portion thereof, or to reimburse Agent or any Bank for any payment made under any Standby Letter of Credit, or to pay any fee or any other amount due Agent or any Bank under any Loan Document, within five (5) Banking Days following the giving of notice by Agent or Requisite Banks of such Default; or (b) Any failure to comply with Section 7.1(j); or (c) Borrowers, any of their Subsidiaries or any other Party fails to perform or observe any other term, covenant or agreement contained in any Loan Document, including, but not limited to, those set forth in Articles 6 and 7 of this Agreement, on its part to be performed or observed within fifteen (15) days after the giving of written notice by Agent or Borrowers otherwise becoming aware of such Default; or (d) Any representation or warranty made in any Loan Document or in any certificate, agreement, instrument or other document made or delivered by any Party pursuant to or in connection with any Loan Document proves to have been incorrect when made in any respect that is materially adverse to the interests of Agent or Banks; or (e) Borrowers or any of their Subsidiaries (i) fail to pay the principal, or any principal installment, of any present or future indebtedness for borrowed money of $200,000 or more or in connection with the purchase or lease of Property, or any guaranty of present or future indebtedness for borrowed money of $200,000 or more or issued in connection with the purchase or lease of Property, on its part to be paid, when due (or within any stated grace period), whether at the stated maturity, upon acceleration, by reason of required prepayment or otherwise or (ii) fails to perform or observe any other term, covenant or agreement on its part to be performed or observed in connection with any present or future indebtedness for borrowed money of $200,000 or more or in connection with the purchase or lease of Property, or of any guaranty of present or future indebtedness of $200,000 or more for borrowed money or issued in connection with the purchase or lease of Property, if as a result of such failure any holder or holders thereof (or an agent or trustee on its or their behalf) has the right to declare such indebtedness due before the date on which it otherwise would become due, or has commenced judicial or nonjudicial action to collect such indebtedness or to foreclose or otherwise realize upon security held therefor, or has taken or is taking such other actions as might materially adversely affect the Collateral, the interests of any Bank under the Loan Documents or the ability of Borrowers or their Subsidiaries to pay and perform their Obligations under the Loan Documents; or (f) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of the Requisite Banks or satisfaction in full of all the Obligations, ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect which, in the reasonable opinion of the Requisite Banks, is materially adverse to the interests of the Banks; or any Party thereto denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind same; or (g) A final judgment against any Borrower or any of its Subsidiaries is entered for the payment of money in excess of $500,000 and such judgment remains unsatisfied without procurement of a stay of execution for more than thirty (30) calendar days after the date of entry of judgment; or 46 (h) Any Borrower or any of Subsidiary thereof, is the subject of an order for relief in a bankruptcy case, or is unable or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any part of its Property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for thirty (30) calendar days; or institutes or consents to any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, custodianship, conservatorship, liquidation, rehabilitation or similar case or proceedings relating to it or to all or any part of its Property under the Laws of any jurisdiction; or any similar case or proceeding is instituted without the consent of that Person and continues undismissed or unstayed for thirty (30) calendar days; or any judgment, writ, warrant of attachment or execution or similar process is issued or levied against all or any material part of the Property of any such Person and is not released, vacated or fully bonded within thirty (30) calendar days after its issue or levy; or (i) Except as otherwise expressly permitted by any Loan Document or agreed to by the Requisite Banks, any Lien on any Collateral created by any Loan Document, at any time after the execution and delivery of that Loan Document and for any reason other than satisfaction in full of all Obligations, ceases or fails to constitute a valid, perfected and subsisting first priority Lien on the Collateral purported to be covered thereby (unless such cessation or failure is the fault of Agent or the Banks to timely file continuation statements); or (j) Any Borrower or any Subsidiary thereof is dissolved or liquidated or all or substantially all of the assets of any Borrower or any Subsidiary thereof are sold or otherwise transferred in violation of the provisions of this Agreement without the written consent of the Requisite Banks. 9.2 Remedies Upon Event of Default. Without limiting any other rights or remedies of Agent or Banks provided for elsewhere in this Agreement, or the Loan Documents, or by applicable Law, or in equity or otherwise: (a) Upon the occurrence of any Event of Default other than an Event of Default described in Section 9.1(f): (1) the Commitment to make Loans and all other obligations of the Agent or the Banks and all rights of Borrowers and any other Parties under the Loan Documents shall terminate without notice to or demand upon Borrowers, which are expressly waived by Borrowers, except that the Requisite Banks may waive the Event of Default or, without waiving, determine, upon terms and conditions satisfactory to Banks, to make further Loans, which waiver or determination shall apply equally to, and shall be binding upon, all of the Banks; and (2) the Requisite Banks may request the Agent to, and the Agent thereupon shall declare all or any part of the unpaid principal of all Notes, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrowers. (b) Upon the occurrence of any Event of Default described in Section 9.1(f): (1) the Commitment to make Loans and all other obligations of Agent or any Bank and all rights of Borrowers and any other Parties under the Loan Documents shall terminate without notice to or demand upon Borrowers, which are expressly waived by Borrowers, except that all of the Banks may waive the Event of Default or, without waiving, determine, in their sole discretion, to make further Loans; and 47 (2) the unpaid principal of all Notes, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents shall be forthwith due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrowers. (c) Upon the occurrence of any Event of Default, Agent and Banks or any of them, without notice to or demand upon Borrowers, which are expressly waived by Borrowers, except as required by California Commercial Code Section 9504 or any modification or replacement statute thereof, or by the terms of this Agreement, may proceed (but only with the consent of the Requisite Banks) to protect, exercise and enforce its rights and remedies under the Loan Documents against Borrowers and such other rights and remedies as are provided by Law or equity. (d) The order and manner in which the Banks' rights and remedies are to be exercised shall be determined by the Requisite Banks in their sole discretion, and all payments received by Agent and the Banks shall be applied first to the costs and expenses (including outside attorneys' fees and disbursements) of Agent, acting as Agent and of Banks pro rata and thereafter to the Obligations owed to Banks, pro rata, under the Agreement. For the purpose of computing Borrowers' Obligations under the Loan Documents, payments shall be applied, first, to the costs and expenses of Agent and Banks, as set forth above, second, to the payment of accrued and unpaid interest due under any Loan Documents to and including the date of such application, third, to the payment of all unpaid principal amounts due under any Loan Documents (including, for the purposes hereof, principal due under the Notes and reimbursement due for payments made under Letters of Credit), and fourth, to the payment of all other amounts (including fees) then owing to Agent and Banks under the Loan Documents. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Banks hereunder or thereunder or at Law or in equity. (e) Upon the occurrence of any event that would be an Event of Default under Section 9.1(g) with the passage of time, Agent and Banks may take such action as the Requisite Banks deem necessary to protect the interests of Banks under the Loan Documents. 48 ARTICLE 10 THE AGENT 10.1 Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof or are reasonably incidental, as determined by Agent, thereto. This appointment and authorization is intended solely for the purpose of facilitating the servicing of the Loans and does not constitute appointment of Agent as trustee for any Bank or as representative of any Bank for any other purpose and, except as specifically set forth in the Loan Documents to the contrary, Agent shall take such action and exercise such powers only in an administrative and ministerial capacity. 10.2 Agent and Affiliates. Sumitomo Bank of California (and each successor Agent) has the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it was not the Agent, and the term "Bank" or "Banks" includes Sumitomo Bank of California in its individual capacity. Sumitomo Bank of California (and each successor Agent) and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with Borrowers, any Subsidiary thereof, or any Affiliate of Borrowers or any Subsidiary thereof, as if it was not the Agent and without any duty to account therefor to Banks. Sumitomo Bank of California (and each successor Agent) need not account to any other Bank for any monies received by it for reimbursement of its costs and expenses as Agent hereunder, or for any monies received by it in its capacity as a Bank hereunder. 10.3 Proportionate Interest of the Banks in any Collateral. Agent, on behalf of all the Banks, shall hold in accordance with the Loan Documents all items of Collateral or interests therein received or held by Agent. Subject to Agent's and the Banks' rights to reimbursement for their costs and expenses hereunder (including attorneys' fees and disbursements and other professional services) and subject to the application of payments in accordance with Section 9.2(d), each Bank shall have an interest in any Collateral or interests therein in the same proportions that the aggregate Obligations owed such Bank under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all the Banks, without priority or preference among the Banks. 10.4 Banks' Credit Decisions. Each Bank agrees that it has, independently and without reliance upon Agent, any other Bank or the directors, officers, agents, employees or attorneys of Agent or of any other Bank, and instead in reliance upon information supplied to it by or on behalf of Borrowers and upon such other information as it has deemed appropriate, made its own independent credit analysis and decision to enter into this Agreement. Each Bank also agrees that it shall, independently and without reliance upon Agent, any other Bank or the directors, officers, agents, employees or attorneys of Agent or of any other Bank, continue to make its own independent credit analyses and decisions in acting or not acting under the Loan Documents. 10.5 Action by Agent. (a) Agent may assume that no Default has occurred and is continuing, unless Agent has actual knowledge of the Default, has received notice from Borrowers stating the nature of the Default, or has received notice from a Bank stating the nature of the Default and that such Bank considers the Default to have occurred and to be continuing. (b) Agent has only those obligations under the Loan Documents as are expressly set forth therein. (c) Except for any obligation expressly set forth in the Loan Documents and as long as Agent may assume that no Event of Default has occurred and is continuing, Agent may, but shall not be required to exercise its discretion to act or not act, except that Agent shall be required to act or not act upon the instructions of the Requisite Banks (or of all the Banks, to the extent required by Section 11.3) and those instructions shall be binding upon Agent and all Banks, provided that Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law. 49 (d) If Agent may not assume that no Event of Default has occurred and is continuing, Agent shall give notice thereof to Banks and shall act or not act upon the instructions of the Requisite Banks (or of all the Banks, to the extent required by Section 11.3), provided that Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law, and except that if the Requisite Banks (or all Banks, if required under Section 11.3) fail, for five (5) Banking Days after the receipt of notice from Agent, to instruct Agent, then Agent, in its discretion, may act or not act as it deems advisable for the protection of the interests of Banks. (e) Agent shall have no liability to any Bank for acting, or not acting, as instructed by the Requisite Banks (or all the Banks, if required under Section 11.3), notwithstanding any other provision hereof. 10.6 Liability of Agent. Neither Agent nor any of its directors, officers, agents, employees or attorneys shall be liable for any action taken or not taken by them under or in connection with the Loan Documents, except for their own gross negligence or willful misconduct. Without limitation on the foregoing, Agent and its directors, officers, agents, employees and attorneys: (a) May treat the payee of any Note as the holder thereof until Agent receives notice of the assignment or transfer thereof, in form satisfactory to Agent, signed by the payee, and may treat each Bank as the owner of that Bank's interest in the Obligations for all purposes of this Agreement until Agent receives notice of the assignment or transfer thereof, in form satisfactory to Agent, signed by that Bank. (b) May consult with legal counsel (including in-house legal counsel), accountants (including in-house accountants) and other professionals or experts selected by it, or with legal counsel, accountants or other professionals or experts for Borrowers and/or their Subsidiaries or Banks, and shall not be liable for any action taken or not taken by it in good faith in accordance with the advice of such legal counsel, accountants or other professionals or experts. (c) Shall not be responsible to any Bank for any statement, warranty or representation made in any of the Loan Documents or in any notice, certificate, report, request or other statement (written or oral) given or made in connection with any of the Loan Documents. (d) Except to the extent expressly set forth in the Loan Documents, shall have no duty to ask or inquire as to the performance or observance by Borrowers or their Subsidiaries of any of the terms, conditions or covenants of any of the Loan Documents or to inspect any Collateral or the Property, books or records of Borrowers or their Subsidiaries. (e) Will not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, effectiveness, sufficiency or value of any Loan Document, any other instrument or writing furnished pursuant thereto or in connection therewith, or any Collateral. (f) Will not incur any liability by acting or not acting in reliance upon any Loan Document, notice, consent, certificate, statement, request or other instrument or writing believed by it to be genuine and signed or sent by the proper party or parties. (g) Will not incur any liability for any arithmetical error in computing any amount paid or payable by the Borrowers or any Subsidiary or Affiliate thereof or paid or payable to or received or receivable from any Bank under any Loan Document, including, without limitation, principal, interest, commitment fees, advances and other amounts; provided that, promptly upon discovery of such an error in computation, the Agent, the Banks and (to the extent applicable) Borrowers and/or their Subsidiaries or Affiliates shall make such adjustments as are necessary to correct such error and to restore the parties to the position that they would have occupied had the error not occurred. 50 10.7 Indemnification. Each Bank shall, ratably in accordance with its percentage of the total Commitment, indemnify and hold Agent and its directors, officers, agents, employees and attorneys harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, attorneys' fees and disbursements) that may be imposed on, incurred by or asserted against it or them in any way relating to or arising out of the Loan Documents (other than losses incurred by reason of the failure of Borrowers to pay the indebtedness represented by the Notes and the Standby Letters of Credit) or any action taken or not taken by it as Agent thereunder, except such as result from its own gross negligence or willful misconduct. Without limitation on the foregoing, each Bank shall reimburse Agent upon demand for that Bank's ratable share of any cost or expense incurred by Agent in connection with the negotiation, preparation, execution, delivery amendment, waiver, restructuring, reorganization (including a bankruptcy reorganization), enforcement or attempted enforcement of the Loan Documents, to the extent that Borrowers or any other Party are required by Section 11.4 to pay that cost or expense but fails to do so upon demand. 10.8 Successor Agent. Agent may resign as such at any time by written notice to Borrowers and the Banks, to be effective upon a successor's acceptance of appointment as Agent. The Requisite Banks at any time may remove Agent by written notice to that effect to be effective on such date as the Requisite Banks designate. In either event: (a) The Requisite Banks shall appoint a successor Agent, who must be from among Banks, provided that any resigning Agent shall be entitled to appoint a successor Agent from among Banks, subject to acceptance of appointment by that successor Agent, if the Requisite Banks have not appointed a successor Agent within thirty (30) days after the date the resigning Agent gave notice of resignation; (b) Upon a successor's acceptance of appointment as Agent, the successor will thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent or the removed Agent; and (c) Upon the effectiveness of any resignation or removal, the resigning Agent or the removed Agent thereupon will be discharged from its duties and obligations thereafter arising under the Loan Documents other than obligations arising as a result of any action or inaction of the resigning Agent or the removed Agent prior to the effectiveness of such resignation or removal. 51 ARTICLE 11 MISCELLANEOUS 11.1 Intentionally Omitted. 11.2 Cumulative Remedies; No Waiver. The rights, powers, privileges and remedies of Agent and Banks provided herein or in any Note or other Loan Document are cumulative and not exclusive of any right, power, privilege or remedy provided by Law or equity. No failure or delay on the part of Agent or any Bank in exercising any right, power, privilege or remedy may be, or may be deemed to be, a waiver thereof; nor may any single or partial exercise of any right, power, privilege or remedy preclude any other or further exercise of the same or any other right, power, privilege or remedy. The terms and conditions of Article 8 hereof are inserted for the sole benefit of Agent and Banks and Agent (acting with the consent of the Requisite Banks) or the Requisite Banks may waive them in whole or in part, with or without terms or conditions, in respect of any Loan or Standby Letter of Credit, without prejudicing Agent's or any Bank's rights to assert them in whole or in part in respect of any other Loan or Standby Letter of Credit. 11.3 Amendments; Consents. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, and no consent to any departure by the Borrowers or any other Party therefrom, may in any event be effective unless in writing signed by Agent with approval of the Requisite Banks (and, in the case of amendments, modifications or supplements of or to any Loan Document to which any Borrower is a Party, the approval in writing of such Borrower), and then only in the specific instance and for the specific purpose given; and, without the approval in writing of all Banks, no amendment, modification, supplement, termination, waiver or consent may be effective: (a) To amend or modify the principal of, or the amount of principal, principal prepayments or the rate of interest payable on, any Note, or the amount of the Commitment or of any commitment fee payable to any Bank, or any other fee or amount payable to any Bank under the Loan Documents or to allow any material release of Collateral; (b) To postpone any date fixed for any payment of principal of, prepayment of principal of or any installment of interest on, any Note, or the facility fee, or any installment of any commitment fee, or any reimbursement obligation due under any Standby Letter of Credit, or to extend the term of the Commitment; (c) To amend or modify the provisions of (1) the definitions of "Commitment", "Maximum Standby Letter of Credit Amount", "Maximum Loan Amount", Requisite Banks or "Total Outstanding"; (2) Articles 8 or 9; or (3) this Section 11.3; or (d) To amend or modify any other definition or provision of this Agreement that expressly requires the consent or approval of the Requisite Banks or some other number of Banks. Any amendment, modification, supplement, termination, waiver or consent pursuant to this Section 10.2 shall apply equally to and shall be binding upon, Agent and all Banks. 11.4 Costs, Expenses and Taxes. Borrowers shall pay on demand the reasonable costs and expenses, including attorneys' fees, of Agent and Banks in connection with the negotiation, preparation, execution and delivery of the Loan Documents, and of Agent and Banks in connection with the amendment, waiver, refinancing, restructuring, reorganization (including a bankruptcy reorganization) and enforcement or attempted enforcement of the Loan Documents, and any matter related thereto, including, without limitation, filing fees, recording fees, title insurance fees, appraisal fees, search fees, audit costs incurred by Agent or Banks during the continuance of or in connection with the occurrence of an Event of Default and other out-of-pocket expenses and the reasonable fees and out-of-pocket expenses of any legal counsel, independent public accountants and other outside experts retained by Agent or any Banks, and including, without limitation, any costs, expenses or fees incurred or suffered by Agent or any Banks in connection with or during the course of 52 any bankruptcy or insolvency proceedings of any Borrower or any Subsidiary thereof. Borrowers shall pay any and all documentary and other taxes (other than income or gross receipts taxes generally applicable to banks) and all costs, expenses, fees and charges payable or determined to be payable in connection with the filing or recording of this Agreement, any other Loan Document or any other instrument or writing to be delivered hereunder or thereunder, or in connection with any transaction pursuant hereto or thereto, and shall reimburse, hold harmless and indemnify Agent and Banks from and against any and all loss, liability or legal or other expense with respect to or resulting from any delay in paying or failure to pay any tax, cost, expense, fee or charge or that any of them may suffer or incur by reason of the failure of any Party to perform any of its Obligations. Any amount payable to Agent or any Bank under this Section 11.4 shall bear interest from the fifth Banking Day following the date of demand for payment at the rate provided for in Section 3.6. 11.5 Nature of Banks' Obligations. The obligations of Banks hereunder are several and not joint or joint and several. Nothing contained in this Agreement or any other Loan Document and no action taken by the Agent or Banks or any of them pursuant hereto or thereto may, or may be deemed to, make Banks a partnership, an association, a joint venture or other entity, either among themselves or with Borrowers or any Affiliate of Borrowers. Each Bank's obligation to make any Loan pursuant hereto is several and not joint or joint and several, and is conditioned upon the performance by all other Banks of their obligations to make Loans. A default by any Bank will not increase the percentage of the Commitment attributable to any other Bank. Any Bank not in default may, if it desires, assume in such proportion as the nondefaulting Banks agree the obligations of any Bank in default, but is not obligated to do so. 11.6 Survival of Representations and Warranties. All representations and warranties contained herein or in any other Loan Document, or in any certificate or other writing delivered by or on behalf of any one or more of the Parties to any Loan Document, will survive the making and repayment of the Loans hereunder and the execution and delivery of the Notes, and have been or will be relied upon by Agent and each Bank, notwithstanding any investigation made by Agent or any Bank or on their behalf. 11.7 Notices. Except as otherwise expressly provided in the Loan Documents: (a) All notices, requests, demands, directions and other communications provided for hereunder or under any other Loan Document must be in writing and must be mailed, telecopied or personally delivered to the appropriate party at the address set forth on the signature pages of this Agreement or other applicable Loan Document or, as to any party to any Loan Document, at any other address as may be designated by it in a written notice sent to all other parties to such Loan Document in accordance with this Section 11.7; and (b) Any notice, request, demand, direction or other communication given by telecopier must be confirmed within 48 hours by letter mailed or delivered to the appropriate party at its respective address. Except as otherwise expressly provided in any Loan Document, if any notice, request, demand, direction or other communication required or permitted by any Loan Document is given by mail it will be effective on the earlier of receipt or the third calendar day after deposit in the United States mail with first class or airmail postage prepaid; if given by telecopier, upon electronic confirmation of receipt, and if given after 4:30 p.m., effective on the next business day; or if given by personal delivery when delivered. 11.8 Execution of Loan Documents. Unless Agent otherwise specifies with respect to any Loan Document, this Agreement and any other Loan Document may be executed in any number of counterparts and any party hereto or thereto may execute any counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts of this Agreement or any other Loan Document, as the case may be, when taken together will be deemed to be but one and the same instrument. The execution of this Agreement or any other Loan Document by any party hereto or thereto will not become effective until counterparts hereof or thereof, as the case may be, have been executed by all the parties hereto or thereto. 11.9 Sharing of Setoffs. Each Bank severally agrees that if it, through the exercise of any right of setoff, banker's lien or counterclaim against Borrowers, or otherwise receives payment of the Obligations held by it that is ratably more than any other Bank, through any means, receives in payment of the Obligations held by that Bank, then: (a) The Bank exercising the right of setoff, banker's lien or counterclaim or otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Bank a participation in the Obligations held by the other Bank and shall pay to the other Bank a purchase price in 53 an amount so that the share of the Obligations held by each Bank after the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment; and (b) Such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of the Banks share any payment obtained in respect of the Obligations ratably in accordance with each Bank's share of the Obligations immediately prior to, and without taking into account, the payment; provided that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Bank by Borrowers or any Person claiming through or succeeding to the rights of Borrowers, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Bank that purchases a participation in the Obligations pursuant to this Section 11.9 shall from and after the purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Bank were the owner of the Obligations purchased. Each Borrower expressly consents to the foregoing arrangements and agrees that any Bank holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim with respect to the participation as fully as if the Bank were the original owner of the Obligation purchased; provided, however, that each Bank agrees that it shall not exercise any right of setoff, banker's lien or counterclaim without first obtaining the consent of the Requisite Banks. 11.10 Binding Effect; Assignment. This Agreement and the other Loan Documents shall be binding upon and shall inure to the benefit of the parties hereto and thereto and their respective successors and assigns, except that Borrowers and/or their Affiliates may not assign their rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Banks. Banks reserve the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or in any interest in, such Bank's rights and obligations under the Loan Documents, except that no Bank shall have the right to sell, assign, pledge or transfer any participation in its rights hereunder or any interest herein (other than to a Federal Reserve Bank for 90 days or less or to any Affiliate of such Bank) without the consent of the Agent and Requisite Banks. 11.11 Assignment of Deposits. As security for the prompt payment and performance of all Obligations, Borrowers hereby assigns to Agent and Banks a security interest in all their right, title, and interest in and to any and all deposit accounts now or hereafter maintained with Agent or any Bank and the proceeds thereof. 11.12 Participation of Loan. Banks shall have the right to participate, sell or assign interests in the Loans with financial institutions on such terms and conditions as may be acceptable to Agent and Requisite Banks. 11.13 Indemnity by Borrowers. Borrowers agree to indemnify, save and hold harmless Agent and Banks and their directors, officers, agents, attorneys and employees (collectively the "Indemnitees") from and against: (a) Any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person (other than Agent or a Bank) if the claim, demand, action or cause of action directly or indirectly relates to a claim, demand, action or cause of action that such Person has or asserts against Borrowers, any Affiliate of Borrowers or any officer, director or shareholder of Borrowers and arises out of or relates to the relationship between Borrowers and Banks under any of the Loan Documents or the transactions contemplated thereby; and (b) Any and all liabilities, losses, costs or expenses (including attorneys' fees and disbursements and other professional services) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action or cause of action; provided that no Indemnitee shall be entitled to indemnification for any loss caused by its own gross negligence or willful misconduct. Each Indemnitee is authorized to employ counsel of its own choosing in enforcing its rights hereunder and in defending against any claim, demand, action or cause of action covered by this Section 11.13; provided that each Indemnitee shall endeavor, in connection with any matter covered by this Section 11.13 which also involves other Indemnitees, to use reasonable efforts to avoid unnecessary duplication of effort by counsel for all Indemnitees. Any obligation or liability of Borrowers to any Indemnitee under this Section 11.13 shall be and hereby is covered and secured by the Loan Documents and the Collateral, and shall survive the expiration or termination of this Agreement and the repayment of all Loans and the payment and performance of all other Obligations owed to Agent and/or Banks. 54 11.14 Nonliability of Banks. Borrowers acknowledge and agree that: (a) Any inspections of Collateral made by or through Agent or any Bank are for purposes of administration of the Loan only and Borrowers are not entitled to rely upon the same; (b) By accepting or approving anything required to be observed, performed, fulfilled or given to Agent or the Banks pursuant to the Loan Documents, including any certificate, financial statement, insurance policy or other document, neither Agent nor any Bank shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Agent or Banks; (c) The relationship between Borrowers and Agent and Banks is, and shall at all times remain, solely that of borrower and lenders; neither Agent nor any Bank shall under any circumstance be construed to be partners or joint venturers of Borrowers or its Affiliates; neither Agent nor any Bank shall under any circumstance be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrowers or their Affiliates, or to owe any fiduciary duty to Borrowers or their Affiliates; neither Agent nor any Bank shall undertake or assume any responsibility or duty to Borrowers or their Affiliates to select, review, inspect, supervise, pass judgment upon or inform Borrowers or their Affiliates of any matter in connection with their Property, any Collateral held by Agent or any Bank or the operations of Borrowers or their Affiliates; Borrowers and their Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Agent or Banks in connection with such matters is solely for the protection of Agent and Banks and no Borrower or any other Person is entitled to rely thereon; and (d) Agent and Banks shall not be responsible or liable to any Person for any loss, damage, liability or claim of any kind relating to injury or death to Persons or damage to Property caused by the actions, inaction or negligence of Borrowers and/or their Affiliates and Borrowers hereby indemnify and hold Bank harmless from any such loss, damage, liability or claim. 11.15 No Third Parties Benefited. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of Borrowers and Agent and Banks in connection with the Loans, and is made for the sole protection of Borrowers and Agent and Banks, and their successors and assigns. Except as provided in Section 11.13, no other Person shall have any rights of any nature hereunder or by reason hereof. 11.16 Further Assurances. Borrowers and their Subsidiaries shall, at their expense and without expense to Agent or any Bank, do, execute and deliver such further acts and documents as Agent or any Bank from time to time reasonably require for the assuring and confirming unto Agent and Banks of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document, or for assuring the validity, perfection, priority or enforceability of any Lien under any Loan Document. 11.17 Integration. This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of Agent or Banks in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 55 11.18 Governing Law. Except to the extent otherwise provided therein, each Loan Document shall be governed by, and construed and enforced in accordance with, the local Laws of California; provided that the local Laws of California shall not apply with respect to any foreclosure of real Property Collateral located outside California, and in no event shall California Code of Civil Procedure Sections 726 and/or 580a and/or 580b and/or 580d apply to any such foreclosure outside of California or to the right of Agent and Banks to obtain a deficiency judgment for all Obligations remaining due following such foreclosure. 11.19 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable or invalid as to any party or in any jurisdiction shall, as to that party or jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions or the operation, enforceability or validity of that provision as to any other party or in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 11.20 Headings. Article and Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 11.21 Time of the Essence. Time is of the essence of the Loan Documents. 11.22 Securities Representation. Each Bank hereby represents that any disposition by it of all or any part of its rights under the Loan Documents shall not violate Section 5 of the Securities Act of 1933 to the extent, if any, applicable. 11.23 Joint Borrower Provisions Borrowers acknowledge and agree that Borrowers shall be jointly and severally liable for all obligations arising under this Agreement, any/or Loan Documents. In furtherance thereof, Borrowers acknowledge and agree as follows: (a) In lieu of maintaining accounts in the name of each of the Persons comprising Borrower (for purposes of this Section, each such Person being referred to as a "Borrowing Entity"), Agent shall maintain a single designated deposit account for Borrowers. Any advance made by Bank hereunder shall be made jointly and severally to all Borrowing Entities. Any payments received by any Bank likewise shall be credited to all Borrowing Entities. While it is anticipated that SCC, Inc. will make Requests for Loans or for Standby Letters of Credit, Requests for Loans or for Standby Letters of Credit may be made by any Borrowing Entity and Agent and any Bank, in its discretion, is authorized to honor and rely upon any such Request or any instructions received from any Responsible Official of any Borrowing Entity. It is expressly agreed and understood by each Borrowing Entity that Agent and each Bank shall have no responsibility to inquire into the appointment, allocation or disposition of any Loans made to Borrowers. All Loans are to be made for the collective account of Borrowers. For the purpose of implementing the joint borrower provisions of the Loan Documents, including without limitation the giving and receiving of notices and other communications, the making of Requests for Loans or Requests for Standby Letters of Credit, the execution and delivery of certificates and the receiving and allocating of disbursements from Bank, Borrowers hereby irrevocably appoint each other as the agent and attorney-in-fact for all purposes of the Loan Documents. (b) It is understood and agreed that the handling of this credit facility on a joint borrowing basis as set forth in this Agreement is solely as an accommodation to Borrowers and at the request of Borrowers, and that Agent and Banks shall incur no liability to Borrowers or any Borrowing Entity as a result thereof. To induce Agent and Banks to do so, and in consideration thereof, each Borrowing Entity hereby agrees to indemnify Agent and Banks and hold Agent and Banks harmless from and against any and all liabilities, expenses, losses, damages and/or claims of damage or injury asserted against Agent and Banks by Borrowers or by any other Person arising from or incurred by reason of Agent's or any Bank's handling of the financing arrangement of Borrowers as herein provided, reliance by Agent and Banks on any requests or instructions from any Borrowing Entity, or any other action taken by Agent and Banks. 56 (c) Each of the Borrowers represents and warrants to Agent and Banks that the request for joint handling of the Loans was made jointly by the Borrowing Entities and that the Borrowing Entities are engaged in an integrated operation that requires financing on a basis permitting the availability of credit from time to time to each of the Borrowing Entities as required for the continued successful operation of each of them and their integrated operations. Each Borrowing Entity expects to derive benefit, directly or indirectly, from such availability because the successful operation of the Borrower is dependent on the continued successful performance of the functions of the integrated group. (d) Each Borrower acknowledges that the liens and security interests created or granted herein and by the other Loan Documents will or may secure obligations of persons or entities other than itself and, in full recognition of that fact, each Borrower consents and agrees that any action by Agent or any Bank with respect to the following shall not affect the enforceability or security hereof or of any other Loan Document: (1) supplement, modify, amend, extend, renew, accelerate, or otherwise change the time for payment or the terms of the obligations of the other Borrowers or any part thereof, including any increase or decrease of the rate(s) of interest thereon; (2) supplement, modify, amend or waive, or enter into or give any agreement, approval or consent with respect to, the obligations of the other Borrowers or any part thereof or any of the Loan Documents or any additional security or guaranties, or any condition, covenant, default, remedy, right, representation or term thereof or thereunder; (3) accept new or additional instruments, documents or agreements in exchange for or relative to any of the Loan Documents or the obligations of Borrowers or any part thereof; (4) accept partial payments on the obligations of Borrowers; (5) receive and hold additional security or guaranties for the obligations of Borrowers or any part thereof; (6) release, reconvey, terminate, waive, abandon, subordinate, exchange, substitute, transfer and enforce any security or guaranties, and apply any security and direct the order or manner of sale thereof as Agent or Banks in their sole and absolute discretion may determine; (7) release any person or entity or any guarantor from any personal liability with respect to the obligations of Borrowers or any part thereof; (8) settle, release on terms satisfactory to Agent or Banks or by operation of applicable laws or otherwise liquidate or enforce any obligations of Borrowers and any security or guaranty therefor in any manner, consent to the transfer of any security and bid and purchase at any sale; and (9) consent to the merger, change or any other restructuring or termination of the corporate existence of Borrowers or any other person, and correspondingly restructure the obligations of Borrowers, and any such merger, change, restructuring or termination shall not affect the liability of Borrowers or the continuing existence of any lien or security interest hereunder, under any other Loan Document to which any Borrower is a party or the enforceability hereof or thereof with respect to all or any part of the obligations of Borrowers. 57 Upon the occurrence of and during the continuance of any Event of Default, Agent and Banks may enforce this Agreement and the other Loan Documents independently as to each Borrower and independently of any other remedy or security Agent or Banks at any time may have or hold in connection with the obligations of Borrowers, and it shall not be necessary for Agent or Banks to marshal assets in favor of any of the Borrowers or any other person or entity or to proceed upon or against and/or exhaust any other security or remedy before proceeding to enforce this Agreement and the other Loan Documents. Each of the Borrowers expressly waives any right to require Agent or Banks to marshal assets in favor of any Borrower or any other person or entity or to proceed against any other person or entity or any Collateral provided by any other person, and agrees that Agent or Banks may proceed against any persons or entities and/or Collateral in such order as it shall determine in its sole and absolute discretion. Agent or Banks may file a separate action or actions against any Borrower, whether action is brought or prosecuted with respect to any other security or against any other person, or whether any other person or entity is joined in any such action or actions. Each of the Borrowers agrees that Agent or Banks and each of the Borrowers and any other person or entity may deal with each other in connection with the obligations of Borrowers or otherwise, or alter any contracts or agreements now or hereafter existing between any of them, in any manner whatsoever, all without in any way altering or affecting the security of this Agreement or the other Loan Documents. The rights of Agent and Banks hereunder and under the other Loan Documents shall be reinstated and revived, and the enforceability of this Agreement and the other Loan Documents shall continue, with respect to any amount at any time paid on account of the obligations of Borrowers which thereafter shall be required to be restored or returned by Agent and Bank upon bankruptcy, insolvency or reorganization of any Borrower or any other person, or otherwise, all as though such amount had not been paid. The enforceability of this Agreement and the other Loan Documents at all times shall remain effective even though the obligations of Borrowers, including any part thereof or any other security or guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable as against any of the Borrowers or any other person or entity and whether or not any of the Borrowers or any other person or entity shall have any personal liability with respect thereto. Each of the Borrowers expressly waives any and all defenses now or hereafter arising or asserted by reason of (a) any disability or other defense of any of the other Borrowers or any other person or entity with respect to the obligations of Borrowers, (b) the unenforceability or invalidity of any security or guaranty for the obligations of Borrowers or the lack of perfection or continuing perfection or failure of priority of any security for the obligations of Borrowers, (c) the cessation for any cause whatsoever of the liability of any other Borrower or any other person or entity (other than by reason of the full payment and performance of all obligations of Borrowers), (d) any failure of Agent or any Bank to marshal assets in favor of any of the Borrowers or any other person, (e) any failure of Agent or any Bank to give notice of sale or other disposition to any of the other Borrowers or any other person or entity or any defect in any notice that may be given in connection with any sale or disposition, (f) any failure of Agent or any Bank to comply in any non-material respect with applicable laws in connection with the sale or other disposition of any Collateral or other security for any obligation of Borrowers, (g) any act or omission of Agent or any Bank or others that directly or indirectly results in or aids the discharge or release of any Borrower or any other person or entity or the obligations of Borrowers or any other security or guaranty therefor by operation of law or otherwise, (h) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety's or guarantor's obligation in proportion to the principal obligation, (i) any failure of Agent or any Bank to file or enforce a claim in any bankruptcy or other proceeding with respect to any person, (j) the election by Agent or any Bank, in any bankruptcy proceeding of any person, of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code, (k) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code, (l) any use of cash collateral under Section 363 of the United States Bankruptcy Code, (m) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any person, (n) the avoidance of any lien or security interest in favor of Agent or any Bank for any reason, or (o) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against any person, including any discharge of, or bar or stay against collecting, all or any of the obligations of Borrowers (or any interest thereon) in or as a result of any such proceeding. 58 (e) Each of the Borrowers represents and warrants to Agent and Banks that such Borrower has established adequate means of obtaining from the other Borrowers, on a continuing basis, financial and other information pertaining to the businesses, operations and condition (financial and otherwise) of the other Borrowers and their respective properties, and each of the Borrowers now is and hereafter will be completely familiar with the businesses, operations and condition (financial and otherwise) of the other Borrowers and their respective properties. Each of the Borrowers hereby expressly waives and relinquishes any duty on the part of Agent or any Bank to disclose to such Borrower any matter, fact or thing related to the businesses, operations or condition (financial or otherwise) of any other Borrower or such other Borrower's properties, whether now known or hereafter known by Agent or any Bank during the life of this Agreement. With respect to any of the obligations of Borrowers, Agent and Banks need not inquire into the powers of any of the Borrowers or the officers or employees acting or purporting to act on its behalf. (f) Notwithstanding anything to the contrary elsewhere contained herein or in any other Loan Document to which any Borrower is a party, each of the Borrowers hereby waives with respect to each other Borrower and its respective successors and assigns (including any surety) and any other party any and all rights at law or in equity, to subrogation, to reimbursement, to exoneration, to contribution, to setoff or to any other rights that could accrue to a surety against a principal, to a guarantor against a maker or obligor, to an accommodation party against the party accommodated, or to a holder or transferee against a maker and which each of the Borrowers may have or hereafter acquire against any other Borrower or any other party in connection with or as a result of any Borrower's execution, delivery and/or performance of this Agreement or any other Loan Document to which any such Borrower is a party until the Obligations hereunder are paid in full. Each of the Borrowers agrees that it shall not have or assert any such rights against any other Borrower or any such Borrower's successors and assigns or any other person or entity (including any surety), either directly or as an attempted setoff to any action commenced against such Borrower by the other such Borrower (as borrower or in any other capacity) or any other person until the obligations hereunder are paid in full. Each of the Borrowers hereby acknowledges and agrees that this waiver is intended to benefit Agent and Banks and shall not limit or otherwise affect any of the Borrowers' liability hereunder, under any other Loan Document to which any Borrower is a party, or the enforceability hereof or thereof. 59 (g) Each of the Borrowers warrants and agrees that each of the waivers and consents set forth herein is made with full knowledge of its significance and consequences, with the understanding that events giving rise to any defense waived may diminish, destroy or otherwise adversely affect rights which each of the Borrowers otherwise may have against the other Borrowers, Agent or any Bank, or others, or against any Collateral. If any of the waivers or consents herein are determined to be contrary to any applicable law or public policy, such waivers and consents shall be effective to the maximum extent permitted by law. 11.24 Waiver of Jury Trial. The parties to this Agreement acknowledge that jury trials often entail additional expenses and delays not occasioned by nonjury trials. The parties to this Agreement further agree and stipulate that a fair trial may be had before a state or federal judge by means of a bench trial without a jury. In view of the foregoing, and as a specifically negotiated provision of this Agreement, each party to this Agreement hereby expressly waives any right to trial by jury of any claim, demand, action or cause of action (1) arising under this Agreement or any other instrument, document or agreement executed or delivered in connection herewith, or (2) in any way connected with or related or incidental to the dealings of the parties hereto or any of them with respect to this Agreement or any other instrument, document or agreement executed or delivered in connection herewith, or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether sounding in contract or tort or otherwise; and each party hereby agrees and consents that any such claim, demand, action or cause of action shall be decided by court trial without a jury, and that any party to this Agreement may file an original counterpart or a copy of this section with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BORROWERS: THE SPORTS CLUB COMPANY, INC. THE SPECTRUM CLUB COMPANY, INC., a Delaware 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 PONTIUS REALTY, INC., L.A./IRVINE SPORTS CLUB, LTD., a California corporation a California limited partnership By: /s/ Timothy O'Brien By: Sports Club, Inc. of California ------------------------------- general partner Timothy O'Brien By: /s/ Timothy O'Brien ----------------------------- Its: Chief Financial Officer 60 SPORTS CLUB, INC. 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 IRVINE SPORTS CLUB, INC., GREEN VALLEY SPECTRUM CLUB, 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 THE SPORTSMED COMPANY, 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 SCC SPORTS CLUB, INC., a Texas corporation By: /s/ Timothy O'Brien Timothy O'Brien Its: Chief Financial Officer Borrowers' Address: c/o The Sports Club Company, Inc. 11100 Santa Monica Boulevard Suite 300 Los Angeles, California 90025 Telephone: (310) 479-5200 Facsimile: (310) 479-5740 61 AGENT: SUMITOMO BANK OF CALIFORNIA, a California banking corporation By: /s/ Noel Ryan -------------------------------------- Noel Ryan Senior Vice President Address: Sumitomo Bank of California 611 West Sixth Street, Suite 3900 Los Angeles, California 90017 Attn: Noel Ryan, Senior Vice President Telecopier: (213) 622-1385 Telephone: (213) 362-5700 BANKS: SUMITOMO BANK OF CALIFORNIA, a California banking corporation By: /s/ Noel Ryan -------------------------------------- Noel Ryan Senior Vice President Address: Sumitomo Bank of California 611 West Sixth Street, Suite 3900 Los Angeles, California 90017 Attn: Noel Ryan, Senior Vice President Telecopier: (213) 622-1385 Telephone: (213) 362-5700 62 COMERICA BANK - CALIFORNIA a California banking corporation By: /s/ Joseph Yurosek -------------------------------------- Joseph Yurosek Vice President Address: Comerica Bank-California 301 E. Ocean Boulevard, Suite 1800 Long Beach, California 90802 Attn: Joseph Yurosek, Vice President Telecopier: (562) 595-8251 Telephone: (562) 590-2530 EX-10.78 17 EXHIBIT 10.78 1 EXHIBIT 10.78 1/11/99 BANK LOAN 2 THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT THIS THIRD AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment"), dated as of January 11, 1999, is entered into by and among THE SPORTS CLUB COMPANY, INC., a Delaware corporation, and certain of its subsidiaries identified in the signature pages to this Amendment (collectively, "Borrowers"), CALIFORNIA BANK & TRUST, a California banking corporation ("CB&T) as successor to Sumitomo Bank of California, COMERICA BANK - CALIFORNIA, a California banking corporation ("Comerica", and collectively with CB&T, "Banks"), and CB&T in its capacity as agent for Banks (in such capacity, "Agent"), in light of the following facts: RECITALS A. Pursuant to that certain Amended and Restated Loan Agreement, dated as of February 2, 1998 and as amended by a First Amendment to Amended and Restated Loan Agreement dated as of February 23, 1998, a Second Amendment to Amended and Restated Loan Agreement dated as of March 16, 1998, and a letter agreement executed by Agent and Borrowers dated August 12, 1998 (collectively, the "Loan Agreement"), Banks are providing Borrowers with certain credit facilities. B. Borrowers, Banks and Agent wish to amend the Loan Agreement to, among other things, permit Borrowers to repurchase common stock of the Borrowers. AGREEMENT NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Banks and the Agent hereby agree as follows: 1. Defined Terms. All initially capitalized terms set forth without definition in the Amendment (including, without limitation, in the recitals hereto) shall have the respective meanings assigned thereto in the Loan Agreement. 2. Amendment to Definitions. Section 1.1 of the Loan Agreement is hereby amended as follows: A. The definition set forth below is eliminated and replaced in its entirety to read in full as follows: 3 "Qualified Stock Repurchase" means the common stock repurchase program instituted in April 1998; provided that the aggregate amount expended in repurchasing common stock of SCC, Inc. shall not exceed $7,800,000 until completion of the Thousand Oaks Sale/Leaseback, after which time the aggregate amount expended shall not exceed $10,800,000." B. The following definition is hereby added to Section 1.1 to read in full as follows: "Thousand Oaks Sale/Leaseback" means the consummation of the sale of certain real property assets and improvements at the Thousand Oaks Site to Equity Advisory Group, and the subsequent reduction of the outstanding balance of loans extended by Banks under the Agreement to no more than Three Million Dollars ($3,000,000). 3. Representations and Warranties. Each representation and warranty made by the Borrowers in Article 4 of the Loan Agreement is true and correct on and as of the date hereof as though made as of the date hereof, except to the extent such representations and warranties relate solely to an earlier date. 4. Full Force and Effect. Each of the Loan Documents is hereby amended such that all references to the Loan Agreement contained in any of such documents shall be deemed to be made with respect to the Loan Agreement as amended by this Amendment. Except as amended hereby, the Loan Agreement and the other Loan Documents shall remain unaltered and in full force and effect. 5. Counterparts. This Amendment may be executed in multiple counterparts, each of which shall constitute an original and all of which, taken together, shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their respective duly authorized officers as of the date first above written. The "Borrowers" THE SPORTS CLUB COMPANY, INC., a Delaware corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer 4 THE SPECTRUM CLUB COMPANY, INC., a California corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer PONTIUS REALTY, INC., a New York corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer SPORTS CLUB, INC. OF CALIFORNIA, A California corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer IRVINE SPORTS CLUB, INC., a California corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer THE SPORTSMED COMPANY, INC. a California corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer 5 L.A./IRVINE SPORTS CLUB, LTD. a California corporation By: Sports Club, Inc. of California, General Partner By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer 6 TALLA NEW YORK, INC. a New York corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer SCC SPORTS CLUB, INC. a Texas corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer GREEN VALLEY SPECTRUM CLUB, INC., a California corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer SPECTRUM CLUB/ANAHEIM HILLS, INC., a California corporation By: /s/ Timothy O'Brien ------------------------------------------ Timothy O'Brien, Chief Financial Officer The "Agent" CALIFORNIA BANK & TRUST a California banking corporation and successor to Sumitomo Bank of California By: /s/ David W. Shaw ------------------------------------------ David W. Shaw, Vice President 7 The "Banks" CALIFORNIA BANK & TRUST, A California banking corporation and successor to Sumitomo Bank of California By: /s/ David W. Shaw ------------------------------------------ David W. Shaw, Vice President COMERICA BANK - CALIFORNIA, a California banking corporation By: /s/ Joseph Yurosek ------------------------------------------ Joseph Yurosek, Vice President EX-10.79 18 EXHIBIT 10.79 1 EXHIBIT 10.79 2/1/99 BANK LOAN 2 ================================================================================ THIRD AMENDED AND RESTATED LOAN AGREEMENT Dated as of February 1, 1999 between THE SPORTS CLUB COMPANY, INC., and various of its subsidiaries, as Borrowers, and COMERICA BANK-CALIFORNIA and such other financial institutions as may become a lending party hereto as Banks and COMERICA BANK-CALIFORNIA, as Agent ================================================================================ 3 TABLE OF CONTENTS
Page ---- ARTICLE 1 DEFINITIONS AND ACCOUNTING TERMS......................................... 2 1.1 Defined Terms............................................................ 2 1.2 Use of Defined Terms..................................................... 15 1.3 Accounting Terms......................................................... 15 1.4 Exhibits and Schedules................................................... 15 ARTICLE 2 LOANS AND LETTERS OF CREDIT.............................................. 15 2.1 General Provisions Regarding Loans and Borrowing Procedures.............. 15 2.2 Intentionally Omitted.................................................... 16 2.3 Prime Rate Loans......................................................... 17 2.4 Eurodollar Loans......................................................... 17 2.5 Redesignation of Loans................................................... 17 2.6 Standby Letters of Credit................................................ 19 2.7 Agent's Right to Assume Funds Available for Advances..................... 22 ARTICLE 3 PAYMENTS AND FEES........................................................ 22 3.1 Principal and Interest................................................... 22 3.2 Commitment Fee........................................................... 25 3.3 Eurodollar Fees and Costs................................................ 25 3.4 Letter of Credit Fees.................................................... 27 3.5 Agent Fee................................................................ 27 3.6 Late Payments/Default Rate............................................... 27 3.7 Computation of Interest and Fees......................................... 28 3.8 Non-Banking Days......................................................... 28 3.9 Manner and Treatment of Payments......................................... 28 3.10 Funding Sources.......................................................... 29 3.11 Failure to Charge Not Subsequent Waiver.................................. 29 3.12 Agent's Right to Assume Payments Will be Made by Borrowers............... 29 3.13 Survivability............................................................ 29 3.14 Unused Line Fee.......................................................... 29 ARTICLE 4 REPRESENTATIONS AND WARRANTIES........................................... 30 4.1 Existence and Qualification; Power; Compliance With Laws................. 30 4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations............................................... 31 4.3 No Governmental Approvals Required....................................... 32 4.4 Subsidiaries............................................................. 32 4.5 Financial Statements..................................................... 33 4.6 No Other Liabilities; No Material Adverse Changes........................ 34 4.7 Intangible Assets........................................................ 34
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Page ---- 4.8 Filing of Financing Statements........................................... 34 4.9 Public Utility Holding Company Act....................................... 34 4.10 Litigation............................................................... 35 4.11 Binding Obligations...................................................... 35 4.12 No Default............................................................... 35 4.13 ERISA.................................................................... 35 4.14 Regulations T, U and X; Investment Company Act........................... 36 4.15 Disclosure............................................................... 36 4.16 Tax Liability............................................................ 36 4.17 Projections.............................................................. 36 4.18 Fiscal Year.............................................................. 37 4.19 Employee Matters......................................................... 37 ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS)....................................................... 37 5.1 Payment of Taxes and Other Potential Charges............................. 37 5.2 Preservation of Existence................................................ 37 5.3 Maintenance of Properties................................................ 38 5.4 Maintenance of Insurance................................................. 38 5.5 Compliance With Laws..................................................... 38 5.6 Additional Borrowers..................................................... 38 5.7 Inspection Rights........................................................ 39 5.8 Keeping of Records and Books of Account.................................. 40 5.9 Compliance With Agreements, Duties and Obligations....................... 40 5.10 Use of Proceeds.......................................................... 40 ARTICLE 6 NEGATIVE COVENANTS....................................................... 40 6.1 Disposition of Property.................................................. 40 6.2 Transactions with Borrowers and Non-Borrower Affiliates.................. 40 6.3 Mergers, Acquisitions and New Club Developments.......................... 41 6.4 Profitability............................................................ 45 6.5 Redemption, Dividends and Distributions; Payments to Partners............ 45 6.6 ERISA.................................................................... 45 6.7 Change in Nature of Business/Management.................................. 46 6.8 Real Property Leases..................................................... 47 6.9 Indebtedness, Guaranties and Liens....................................... 47 6.10 Transactions with Affiliates............................................. 48 6.11 Change in Fiscal Year.................................................... 48 6.12 Capital Expenditures and Purchase Money Transactions..................... 48 6.13 Tangible Net Worth....................................................... 49 6.14 Ratio of Total Unsubordinated Liabilities to Tangible Net Worth.......... 50 6.15 Debt Service Coverage Ratio.............................................. 50 6.16 Intentionally Omitted.................................................... 50 6.17 Loans to Officers........................................................ 50 6.18 Deposit Accounts......................................................... 50 6.19 Ratio of Funded Debt to EBITDA........................................... 50
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Page ---- ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS................................... 50 7.1 Financial and Business Information....................................... 50 7.2 Compliance Certificates.................................................. 54 7.3 Revisions or Updates to Schedules........................................ 55 7.4 New Club Development Project Reports..................................... 55 ARTICLE 8 CONDITIONS............................................................... 56 8.1 Initial Loans, Etc....................................................... 56 8.2 Any Loan................................................................. 57 ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT..................... 59 9.1 Events of Default........................................................ 59 9.2 Remedies Upon Event of Default........................................... 61 ARTICLE 10 THE AGENT................................................................ 63 10.1 Appointment and Authorization............................................ 63 10.2 Agent and Affiliates..................................................... 63 10.3 Proportionate Interest of the Banks in any Collateral.................... 64 10.4 Banks' Credit Decisions.................................................. 64 10.5 Action by Agent.......................................................... 64 10.6 Liability of Agent....................................................... 65 10.7 Indemnification.......................................................... 66 10.8 Successor Agent.......................................................... 67 ARTICLE 11 MISCELLANEOUS............................................................ 67 11.1 Intentionally Omitted.................................................... 67 11.2 Cumulative Remedies; No Waiver........................................... 67 11.3 Amendments; Consents..................................................... 68 11.4 Costs, Expenses and Taxes................................................ 68 11.5 Nature of Banks' Obligations............................................. 69 11.6 Survival of Representations and Warranties............................... 70 11.7 Notices.................................................................. 70 11.8 Execution of Loan Documents.............................................. 70 11.9 Sharing of Setoffs....................................................... 70 11.10 Binding Effect; Assignment............................................... 71 11.11 Assignment of Deposits................................................... 72 11.12 Participation of Loan.................................................... 72 11.13 Indemnity by Borrowers................................................... 72 11.14 Nonliability of Banks.................................................... 73 11.15 No Third Parties Benefited............................................... 74 11.16 Further Assurances....................................................... 74 11.17 Integration.............................................................. 74 11.18 Governing Law............................................................ 74 11.19 Severability of Provisions............................................... 74
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Page ---- 11.20 Headings................................................................. 75 11.21 Time of the Essence...................................................... 75 11.22 Securities Representation................................................ 75 11.23 Joint Borrower Provisions................................................ 75 11.24 Waiver of Jury Trial..................................................... 81
THIRD AMENDED AND RESTATED LOAN AGREEMENT 4 7 Dated as of February 1, 1999 WHEREAS, The Sports Club Company, Inc., The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine Sports Club, Inc., The SportsMed Company, Inc., formerly HealthFitness Organization of America, Inc., L.A./Irvine Sports Clubs, Ltd., Talla New York, Inc., SCC Sports Club, Inc., Spectrum Club/Anaheim Hills, Inc. and Green Valley Spectrum Club, Inc. are parties to that certain Amended and Restated Loan Agreement dated as of February 2, 1998 as amended by a First Amendment dated as of February 23, 1998, a Second Amendment dated as of March 16, 1998, a Second Amended and Restated Loan Agreement dated as of June 9, 1998, and a Third Amendment to Amended and Restated Loan Agreement dated as of January __, 1999 with Sumitomo Bank of California and Comerica Bank-California as lenders and Sumitomo Bank of California as the agent ("Predecessor Agent") for such lenders, and to that certain letter agreement with Predecessor Agent dated August 12, 1998 (collectively, the "Original Loan Agreement"); and WHEREAS, pursuant to that certain Assignment and Acceptance Agreement dated as of February 1, 1999 by and between California Bank & Trust, a California banking corporation, as successor to Sumitomo Bank of California, and Comerica Bank-California, California Bank & Trust assigned to Comerica Bank-California, and Comerica Bank-California accepted, all of the rights of California Bank & Trust under the Original Loan Agreement, including but not limited to under the Loan Documents and in the Loans; WHEREAS, pursuant to Section 10.8 of the Original Loan Agreement, Predecessor Agent has resigned as agent for the Banks (as defined below) and the Agent (as defined below) has accepted the appointment as successor to the Predecessor Agent as agent for the Banks under this Third Amended and Restated Loan Agreement; WHEREAS, Borrowers, Comerica Bank-California and Agent have agreed to amend and restate the Original Loan Agreement to provide for, among other things, certain modifications to the financial and reporting covenants; and WHEREAS, Borrowers, Agent and Banks do hereby enter into this Third Amended and Restated Loan Agreement in place and stead of the Original Loan Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: ARTICLE 1 5 8 DEFINITIONS AND ACCOUNTING TERMS 1.1 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth respectively after each: "Acquisition" means any transaction, or any series of related transactions, by which any Borrower and/or any of its Subsidiaries directly or indirectly acquires control of any going business or all or substantially all of the assets of any firm, partnership, joint venture, limited liability company, corporation (or division thereof) operating as a health and fitness facility, whether through purchase of assets, merger or otherwise, (control meaning possession, directly or indirectly, of the power to direct or cause the direction of management or policies of such entities); provided that, in any event, the term "Acquisition" shall include any acquisition in which any Borrower and/or any Subsidiaries thereof controls a majority in ordinary voting power of the securities of a corporation operating as a health and fitness facility which have ordinary voting power for the election of directors or other governing body of a corporation (other than securities having such power only by reason of the happening of a contingency), or control 50% or more ownership interest in any partnership, limited liability company or joint venture operating as a health and fitness facility. "Affiliate" means, as to any Person, any other Person which directly or indirectly controls, or is under common control with, or is controlled by, such Person. As used in this definition, "control" (and its correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that, in any event, any Person that owns, directly or indirectly, 50% or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation (other than securities having such power only by reason of the happening of a contingency), or 50% or more of the partnership or other ownership interests of any other Person (other than as a limited partner of such other Person), will be deemed to control such corporation or other Person. "Agent" means Comerica Bank - California, a California state bank, when acting in its capacity as agent under any of the Loan Documents, and any successor agent. "Agent's Office" means the office designated by Agent as its address for purposes of notice under this Agreement. "Agreement" means this Third Amended and Restated Loan Agreement, either as originally executed or as it may from time to time be supplemented, modified, amended, restated or extended. 6 9 "Applicable Pricing Level" means, for any Eurodollar Period, the pricing level set forth below opposite the ratio of Funded Debt to EBITDA, which Agent shall determine quarterly upon, and with effect from and after the date of, Agent's receipt of the quarterly compliance certificates required by Section 7.2 of this Agreement:
Ratio of Funded Debt Pricing Level to EBITDA ------------- --------- I Less than 2.50 to 1.0 II Equal to or greater than 2.50 to 1.00 but less than 3.25 to 1.00 III Equal to or greater than 3.25 to 1.00.
"Bank" or "Banks" means individually or collectively Comerica Bank - California and any one or more banks or other financial institutions which become lending parties to this Agreement in accordance with the terms hereof. "Banking Day" means any Monday, Tuesday, Wednesday, Thursday or Friday on which all of the Banks are open for business at their respective addresses for notice designated as provided herein. "Borrower or Borrowers" means, individually or collectively, The Sports Club Company, Inc., The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine Sports Club, Inc., The SportsMed Company, Inc., L.A./Irvine Sports Clubs, Ltd., Talla New York, Inc., SCC Sports Club, Inc., Green Valley Spectrum Club, Inc., Spectrum Club Anaheim and any subsequent Person who becomes a Borrower pursuant to the terms hereof. "Capital Expenditure" means any expenditure (including any capitalized lease expenditure) that is considered a capital expenditure under generally accepted accounting principles, consistently applied, including, without limitation, any amount that is required to be treated as a capitalized asset pursuant to Financial Accounting Standards Board Statement No. 13. "Cash" means, when used in connection with any Person, all monetary and non-monetary items belonging to such Person that are treated as cash in accordance with generally accepted accounting principles, consistently applied. "Cash Equivalents" means, when used in connection with any Person, such Person's Investments in: 7 10 (a) Government Securities due within one year after the date of the making of the Investment; (b) certificates of deposit issued by, bank deposits in, bankers' acceptances of, and repurchase agreements covering, Government Securities executed by, any bank doing business in and incorporated under the Laws of the United States of America or any state thereof and having on the date of such Investment combined capital, surplus and undivided profits of at least $100,000,000, in each case due within one year after the date of the making of the Investment; and/or (c) readily marketable commercial paper of corporations doing business in and incorporated under the Laws of the United States of America or any state thereof given on the date of such Investment the highest credit rating by NCO/Moody's Commercial Paper Division of Moody's Investors Service, Inc. or Standard & Poor's Corporation, in each case due within six months after the date of the making of the Investment. "Certificate of a Responsible Official" means a certificate signed by a Responsible Official of the Person providing the certificate. "Closing Date" means the Banking Day on which the consummation of all of the transactions contemplated in Section 8.1 occurs. "Club" means a health and fitness facility operated by any Borrower. "Collateral" means, collectively, all Property on or in which the Agent or any Bank has a Lien pursuant to this Agreement or any other Loan Document. "Commitment" means, collectively, the lending commitment hereunder of Comerica Bank - California, 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:
Bank Amount Percentage ---- ------ ---------- Comerica Bank - California $30,000,000 100%
"Default" means any Event of Default and/or any event that, with the giving of notice or passage of time or both, would be an Event of Default. "Default Rate" means the rate of interest per annum otherwise provided under this Agreement plus two percent (2%). 8 11 "Designated Deposit Account" means deposit account no. 01800220570 to be maintained by Borrowers with Agent at Agent's Office, or such other deposit account as from time to time designated by Borrowers by written notification to Agent and approved by Agent. "Designated Eurodollar Market" means, with respect to any Eurodollar Loan, the London Eurodollar Market, or such other Eurodollar Market as may from time to time be designated by Agent. "dollars" or "$" means United States dollars. "EBITDA" means, for any fiscal period, for Borrowers, their Subsidiaries, Sports Connection-ES/MB, to the extent of Borrowers' interest therein, and, on a pro forma basis, any entity acquired by any of the Borrowers or any of the Subsidiaries, adjusted for verifiable cost savings acceptable to Banks: (a) the consolidated net income before extraordinary items of such Persons for that period, determined in accordance with generally accepted accounting principles, consistently applied, plus (b) consolidated interest expense for that period, plus (c) income tax expense for that fiscal period, plus (d) depreciation expense for that fiscal period plus (e) amortization expense for that fiscal period. "ERISA" means the Employee Retirement Income Security Act of 1974, and any regulations issued pursuant thereto, as amended or replaced and as in effect from time to time. "Eurodollar Banking Day" means any Banking Day on which dealings in dollar deposits are conducted by and between banks in the Designated Eurodollar Market. "Eurodollar Lending Office" means as to each Bank, its office or branch so designated by written notice to Borrowers and Agent as its Eurodollar Lending Office. If no Eurodollar Lending Office separately is designated by a Bank, its Eurodollar Lending Office shall be its office as designated for purposes of notice hereunder. "Eurodollar Loan" means a Loan made hereunder and designated or redesignated as a Eurodollar Loan in accordance with Article 2. "Eurodollar Market" means a regular established market located outside the United States of America by and among banks for Eurodollar Obligations. "Eurodollar Obligations" means eurocurrency liabilities, as defined in Regulation D. "Eurodollar Period" means, as to each Eurodollar Loan, the period commencing on the date specified by Borrowers pursuant to Sections 2.1(b) or 2.5(c) and ending 30, 60 or 90 days 9 12 thereafter, as specified by Borrowers in the applicable Request for Loan or Request for Redesignation of Loans, provided that: (a) The first day of any Eurodollar Period shall be a Eurodollar Banking Day; (b) Any Eurodollar Period that would otherwise end on a day that is not a Eurodollar Banking Day shall be extended to the next succeeding Eurodollar Banking Day unless such Eurodollar Banking Day falls in another calendar month, in which case such Eurodollar Period shall end on the next preceding Eurodollar Banking Day; and (c) No Eurodollar Period shall extend beyond the Maturity Date. "Eurodollar Rate" means, with respect to any Eurodollar Loan, (a) the LIBOR Rate offered for deposits as of about 10:00 a.m., Los Angeles time, two (2) Eurodollar Banking Days before the first day of the applicable Eurodollar Period in an aggregate amount approximately equal to the amount of such Eurodollar Loan and for a period of time comparable to the number of days in the applicable Eurodollar Period divided by (b) 1.00 minus the Reserve Percentage. The determination of the Eurodollar Rate by Agent shall be conclusive in the absence of manifest error. "Eurodollar Rate Spread" means, for each Eurodollar Period, the applicable additional component of interest, expressed as a percentage per annum, set forth below opposite the Applicable Pricing Level, to be added to the Eurodollar Rate in determining the applicable rate of interest for Eurodollar Loans:
Applicable Pricing Eurodollar Rate Level Spread ----- ------ I 1.50% II 1.75% III 2.00%
"Event of Default" shall have the meaning provided in Section 9.1. "Existing Real Property Liens" shall have the meaning provided in Section 7.2. "Funded Debt" means all liabilities of Borrowers and their Subsidiaries for borrowed money, including capitalized leases. 10 13 "Global Collateral Documents Amendment" means that certain Global Collateral Documents Amendment, of even date herewith, by and among Agent, SCC, Inc., Sports Club, Inc. of California and the Parties to the Pledge Agreement (Partnership), substantially in the form of Exhibit A hereto. "Government Securities" means readily marketable direct obligations of the United States of America or obligations fully guarantied by the United States of America. "Governmental Agency" means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality or public body, (c) any court, administrative tribunal or public utility, or (d) any arbitration tribunal or other non-governmental authority to whose jurisdiction a Person has consented. "Investment" means, when used in connection with any Person, any investment by or of that Person, whether by means of purchase or other acquisition of stock or other securities or by means of loan, advance, capital contribution, guaranty or other debt or equity participation or interest in any other Person, or otherwise, and includes, without limitation, any partnership and joint venture interests of such Person. "Issuing Bank" means, with respect to any Standby Letter of Credit, Comerica Bank - California or any other Bank designated by Borrowers (with the consent of the Requisite Banks) which issued that Standby Letter of Credit. "Laws" means, collectively, all international, foreign, federal, state and local statutes, treaties, rules, regulations, ordinances, codes and administrative or judicial precedents. "LIBOR Rate" means the interest (rounded upward to the nearest 1/16th of one percent) as determined by the British Bankers Association and disseminated daily as an average of the rate at which certain major banks would offer U.S. dollar deposits for the applicable Eurodollar Period to other major banks in the London inter-bank market. "Lien" means any mortgage, deed of trust, pledge, hypothecation, security interest, encumbrance, lien or charge of any kind, whether voluntarily incurred or arising by operation of Law or otherwise, affecting any Property, including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and/or the filing of or agreement to give any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction. "Loan" or "Loans" means the advances to be made by Banks to Borrowers pursuant to this Agreement. Each individual Loan shall consist of advances made by Banks pursuant to 11 14 Article 2, including advances made as new advances, and also including advances made by converting or redesignating existing advances in accordance with the provisions of Article 2. In connection with each Loan, the amount of such Loan by each Bank shall be determined according to that Bank's percentage share of the Commitment. "Loan Documents" means, collectively, this Agreement, the Global Collateral Documents Amendment, the Notes, the Pledge Agreements, the Pledge Agreement (Partnership), the Standby Letters of Credit, any assignments, any financing statements and any other certificates, documents or agreements of any type of nature heretofore or hereafter executed or delivered by Borrowers and/or any one or more of their Subsidiaries or Affiliates to Agent or to Banks in any way relating to or in furtherance of this Agreement, in each case either as originally executed or as the same may from time to time be supplemented, modified, amended, restated or extended. "Maturity Date" means May 31, 2000, subject to the option of Banks, in their sole and absolute discretion, following the written request of Borrowers, to be received by Agent no later than sixty (60) days prior to each anniversary of the date of this Agreement, and subject to such terms and conditions as Bank may require, to extend the Maturity Date for an additional period of one year. "Maximum Loan Amount" means, as of any date of determination thereof, the amount of the Commitment. "Maximum Standby Letter of Credit Amount" means $8,000,000. "Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. "New Club Development" means the establishment de novo of a new health and fitness facility, or any other investment in a health and fitness facility that does not constitute an Acquisition, by one or more existing or future Borrowers and/or Subsidiaries. "Non-Borrower Affiliate" means any Affiliate of a Borrower, now existing or hereafter acquired, that is not a Borrower hereunder. "Note" means any of the promissory notes executed by Borrowers in favor of Banks evidencing the Loans made by Banks or any of them under the Commitment, substantially in the form of Exhibit B hereto, either as originally executed or as the same may from time to time be supplemented, modified, amended, renewed, extended or refinanced. "Obligations" means all present and/or future obligations of every kind or nature of Borrowers or any Party at any time and/or from time to time owed to Agent or Banks or any one or 12 15 more of them, under any one or more of the Loan Documents, whether due or to become due, matured or unmatured, liquidated or unliquidated, or contingent or noncontingent, including obligations of performance as well as obligations of payment, and including interest that accrues prior to or after the commencement of any bankruptcy or insolvency proceeding by or against any Borrower or any Party. "Opinion of Counsel" means the favorable written legal opinion of Kinsella, Boesch, Fujikawa and Towle, as counsel to Borrowers and their Subsidiaries, in a form acceptable to Agent, together with copies of all factual certificates and legal opinions upon which such counsel has relied. "Outstanding Standby Letters of Credit" means, as of any date of determination thereof, the aggregate face amount of all Standby Letters of Credit outstanding on such date, not to exceed the Maximum Standby Letter of Credit Amount. "Party" means any Person (including Borrowers and/or any Subsidiaries or Affiliates of Borrowers), other than Agent and Banks, which now or hereafter is a party to any of the Loan Documents. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereof established under ERISA. "Person" means any entity, whether an individual, trustee, corporation, general partnership, limited partnership, limited liability company, joint stock company, trust, unincorporated organization, bank, business association, firm, joint venture, Governmental Agency, or otherwise. "Plan" means any employee benefit plan subject to ERISA and maintained by Borrowers and/or any Subsidiary thereof or to which Borrowers and/or any Subsidiary thereof are required to contribute on behalf of their employees. "Pledge Agreement" means the Pledge Agreement, dated as of February 2, 1998, executed by SCC, Inc. and Sports Club, Inc. of California in favor of Agent for the ratable benefit of Banks, as amended by the Global Documents Amendment and as such document may from time to time hereafter be supplemented, modified, amended, restated or extended. "Pledge Agreement (Partnership)" means the Pledge Agreement (Partnership), dated as of February 2, 1998 executed by certain Borrowers identified therein as the "Grantors" in favor of Agent for the ratable benefit of Banks, as amended by the Global Documents Amendment and as such document may from time to time hereafter be supplemented, modified, amended, restated or extended. 13 16 "Prime Rate" means the floating commercial loan rate of Comerica Bank - California, announced from time to time as its "base rate", which interest rate may not necessarily be the lowest interest rate at which Comerica Bank -California is willing to extend credit facilities. "Prime Rate Loan" means a Loan designated or redesignated as a Prime Rate Loan in accordance with Article 2, or converted to a Prime Rate Loan in accordance with Section 3.3(a). "Prime Rate Spread" means the additional component of interest, expressed as a percentage per annum, to be added to the Prime Rate in determining the applicable rate of interest for Prime Rate Loans. As of the date of this Agreement, the Prime Rate Spread is zero percent (0%) per annum. "Property" means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible. "Qualified Stock Repurchase" means the common stock repurchase program instituted in April, 1998; provided that the aggregate amount expended in repurchasing common stock of SCC, Inc. shall not exceed $7,800,000 until completion of the Thousand Oaks Sale/Leaseback, after which time the aggregate amount expended shall not exceed $10,800,000." "Regulations T, U and X " means Regulation T,U and X as at any time amended, of the Board of Governors of the Federal Reserve System, or any other regulation in substance substituted therefor. "Request for Standby Letter of Credit" means a written request for the issuance of a Standby Letter of Credit substantially in the form of Exhibit "C", signed by a Responsible Official of a Borrower on behalf of the Borrowers and properly completed to provide all information required to be included therein. "Request for Loan" means a written request for a Loan substantially in the form of Exhibit "D", signed by a Responsible Official of a Borrower on behalf of the Borrowers and properly completed to provide all information required to be included therein. "Request for Redesignation of Loans" means a written request for redesignation of Loans substantially in the form of Exhibit "E", signed by a Responsible Official of a Borrower on behalf of the Borrowers and properly completed to provide all information required to be included therein. 14 17 "Requisite Banks" means, at any time, Banks holding at least 70% of the aggregate unpaid amount of the Loans outstanding, or, if no Loans then are outstanding, Banks having at least 70% of the aggregate Commitment then in effect. "Reserve Percentage" means the total of the maximum reserve percentages for determining the reserves to be maintained by member banks of the Federal Reserve System for eurocurrency liabilities, as defined in Regulation D, rounded upward to the nearest 1/100th of one percent. The percentage will be expressed as a decimal, and will include, without limitation, marginal, emergency, supplemental, special, and other reserve percentages. "Responsible Official" means: (a) When used with reference to any Person, other than an individual, any corporate officer of such Person, general partner of such Person, corporate officer of a corporate general partner of such Person, or corporate officer of a corporate general partner of a partnership that is a general partner of such Person, or any other responsible official thereof duly acting on behalf thereof; and (b) When used with reference to a Person who is an individual, such Person. Except as otherwise specifically provided herein, any requirement that any document or certificate be signed or executed by any Person requires that such document or certificate be signed or executed by a Responsible Official of such Person, and that the Responsible Official signing or executing such document or certificate on behalf of such Person shall be authorized to do so by all necessary corporate, partnership and/or other action. "Right of Others" means, as to any Property in which a Person has an interest, any legal or equitable claim, right, title or other interest (other than a Lien) in or with respect to that Property held by any other Person, and any option or right held by any other Person to acquire any such claim, right, title or other interest, including any option or right to acquire a Lien. "SCC, Inc." means The Sports Club Company, Inc., a Delaware corporation. "Special Eurodollar Circumstance" means the application or adoption of any Law or interpretation, or any change therein or thereof, or any change in the interpretation or administration thereof by any Governmental Agency, central bank or comparable authority charged with the interpretation or administration thereof, or compliance by any Bank or its Eurodollar Lending Office with any request or directive (whether or not having the force of Law) of any such Governmental Agency, central bank or comparable authority, or the existence or occurrence of 15 18 circumstances affecting the Designated Eurodollar Market generally, in each case, that is beyond the reasonable control of such Bank. "Standby Letter of Credit" means any standby letter of credit issued by the Issuing Bank pursuant to Section 2.6, in the standard form for standby letters of credit of the Issuing Bank, either as originally issued or as the same may from time to time be supplemented, modified, amended, renewed or extended. "Subsidiary" means, as of any date of determination thereof and with respect to any Person, any corporation, limited liability company, partnership or joint venture, whether now existing or hereafter organized or acquired: (a) in the case of a corporation, of which a majority of the securities having ordinary voting power for the election of directors or other governing body (other than securities having such power only by reason of the happening of a contingency) are at the time owned by such Person and/or one or more Subsidiaries of such Person, or (b) in the case of a partnership, joint venture or limited liability company, of which such Person or a Subsidiary of such Person is a general partner or joint venturer or of which a majority of the partnership or other ownership interests are at the time owned by such Person and/or one or more of its Subsidiaries. "Tangible Net Worth" means, as of any date of determination thereof, the consolidated net worth of Borrowers, excluding goodwill, patents, trademarks, trade names, organization expenses, capitalized acquisition expenses, deferred tax assets and money due from any Affiliate, officers, directors or shareholders of Borrowers or their Subsidiaries, determined in accordance with generally accepted accounting principles, consistently applied. "The Sports Club/Irvine" means the athletic club owned by Irvine Sports Club, Inc. located at 1980 Main Street, Irvine, California. "The Sports Club/LA" means the athletic club owned by L.A./Irvine Sports Clubs, Ltd. located at 1835 Sepulveda Boulevard, West Los Angeles, California. "Thousand Oaks Sale/Leaseback" means the consummation of the sale of certain real property assets and improvements at the Thousand Oaks Site to Equity Advisory Group, and the subsequent reduction of the outstanding balance of Loans extended by Banks under this Agreement. "to the best knowledge of" means, when modifying a representation, warranty or other statement of any Person, that the fact or situation described therein is known by the Person (or, in the case of a Person other than a natural Person, known by a Responsible Official of that Person) making the representation, warranty or other statement, or with the exercise of reasonable due diligence under the circumstances (in accordance with the standard of what a reasonable Person in similar circumstances would have done) should have been known by the Person (or, in the case of a 16 19 Person other than a natural Person, should have been known by a Responsible Official of that Person). "Total Unsubordinated Liabilities" means, as of any date of determination thereof, the sum of (a) all liabilities that should be reflected as a liability in a consolidated balance sheet of Borrowers and its Subsidiaries on such date prepared in accordance with generally accepted accounting principles, consistently applied, minus (b) subordinated debt as to which a subordination agreement acceptable to Agent has been executed and all deferred membership revenues, plus (c) the aggregate face amount of all outstanding Standby Letters of Credit and other letters of credit issued at the request of Borrowers; provided, however, that any amount described in clause (c) shall be added only to the extent that the Standby Letter of Credit or other letter of credit covers liabilities that would not be reflected in a consolidated balance sheet of Borrowers and its Subsidiaries on such date. "Total Outstanding" means, as of any date of determination thereof, the sum of (a) all outstanding Loans evidenced by the Notes on that date and (b) Outstanding Standby Letters of Credit. "type", when used with respect to any Loan, means the designation of whether such Loan is a Prime Rate Loan or a Eurodollar Loan. 1.2 Use of Defined Terms. Any defined term used in the plural shall refer to all members of the relevant class, and any defined term used in the singular shall refer to any one or more of the members of the relevant class. 1.3 Accounting Terms. All accounting terms not specifically defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, generally accepted accounting principles applied on a consistent basis, as in effect on the date hereof, except as otherwise specifically prescribed herein. 1.4 Exhibits and Schedules. All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. ARTICLE 2 LOANS AND LETTERS OF CREDIT 2.1 General Provisions Regarding Loans and Borrowing Procedures. 17 20 (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 $30,000,000. 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. (b) Except as otherwise provided in Section 2.5(c), each Loan shall be made pursuant to a written Request for Loan. Not later than 11:00 a.m., Los Angeles time, at least two (2) Banking Days prior to the date that a proposed Loan is to be made (unless greater notice is required by Section 2.4), Agent shall have received, at Agent's Office, a properly completed Request for Loan specifying the requested (1) date of such Loan, (2) type of Loan, (3) amount of such Loan, and (4) in the case of a Eurodollar Loan, specifying the Eurodollar Period. Agent may, in its sole and absolute discretion, permit any Request for Loan to be made by telephone or telecopier by a Responsible Official of a Borrower on behalf of Borrowers, in which case such Borrower shall confirm same by mailing or faxing a written Request for Loan to Agent within 48 hours following the Loan. If Borrowers fail to make a written Request for Loan, Borrowers hereby waive the right to dispute the amount, interest rate or term of any such Loan made upon such telephone request. (c) Promptly following receipt of a Request for Loan, Agent shall notify each Bank by telephone, telecopier or Telex of the date and type of the Loan, the applicable Eurodollar Period (in the case of a Eurodollar Loan), and that Bank's pro rata portion of the Loan. Not later than 11:00 a.m., Los Angeles time, on the date specified for any Loan, each Bank shall make its portion of the Loan in immediately available funds available to Agent at Agent's Office. Upon fulfillment of the applicable conditions set forth in Article 8, all Loans shall be credited in immediately available funds to Borrowers' Designated Deposit Account, or to such other deposit account of Borrowers with Agent as Borrowers may specify in writing to Agent. (d) Unless the Requisite Banks otherwise consent, the aggregate amount of each Eurodollar Loan shall be in an integral multiple of $250,000, and the aggregate amount of each Prime Rate Loan shall be in an integral multiple of $100,000 or the balance of the Commitment. (e) The Loans made by each Bank shall be evidenced by that Bank's Note. (f) A Request for Loan shall be irrevocable upon receipt by Agent. 2.2 Intentionally Omitted. 18 21 2.3 Prime Rate Loans. All Loans shall constitute Prime Rate Loans unless properly designated or redesignated as Eurodollar Loans pursuant to Sections 2.4 or 2.5. 2.4 Eurodollar Loans. (a) Subject to the terms and conditions set forth in this Agreement, Borrowers may, from time to time, designate all or any portion of the Loans to be Eurodollar Loans. (b) Each request by Borrowers for a Eurodollar Loan shall be made pursuant to a Request for Loan received by Agent, at Agent's Office, not later than 12:00 noon, Los Angeles time, at least three (3) Eurodollar Banking Days before the first day of the applicable Eurodollar Period. (c) At or about 10:00 a.m., Los Angeles time, two (2) Eurodollar Banking Days before the first day of the applicable Eurodollar Period, Agent shall determine the applicable Eurodollar Rate (which determination shall be conclusive in the absence of manifest error) and promptly shall give notice of the same to Borrowers and the Banks by telephone or telecopier. (d) Upon fulfillment of the applicable conditions set forth in Article 8, a Eurodollar Loan shall become effective on the first day of the applicable Eurodollar Period. (e) Unless the Requisite Banks otherwise consent, no more than six (6) Eurodollar Loans, in the aggregate, shall be outstanding at any one time. (f) Nothing contained herein shall require any Bank to fund any Eurodollar Loan in the Designated Eurodollar Market. 2.5 Redesignation of Loans. (a) Subject to Section 8.2, if any Eurodollar Loan is not repaid or renewed on the last day of the applicable Eurodollar Period, such Eurodollar Loan automatically shall be redesignated as a Prime Rate Loan on such date. (b) Subject to the terms and conditions set forth in this Agreement, at any time and from time to time from the Closing Date until the thirty-third day preceding the Maturity Date, Borrowers may request that all or a portion of outstanding Prime Rate Loans be redesignated as a Eurodollar Loan or that a maturing Eurodollar Loan be redesignated as a new Eurodollar Loan, provided that no Loan redesignated as a Eurodollar Loan shall have a Eurodollar Period expiring after the Maturity Date. 19 22 (c) Each redesignation of all or a portion of outstanding Prime Rate Loans or to renew a maturing Eurodollar Loan as a Eurodollar Loan shall be made pursuant to a written Request for Redesignation of Loans. Not later than 12:00 noon, Los Angeles time, at least three (3) Eurodollar Banking Days prior to the first day of the applicable Eurodollar Period, Agent shall have received, at Agent's Office, a properly completed Request for Redesignation of Loans specifying the requested (1) date of redesignation and (2) amount of Loans to be redesignated as a Eurodollar Loan, and (3) the applicable Eurodollar Period. Agent may, in its sole and absolute discretion, permit a Request for Redesignation of Loans to be made by telephone by a Responsible Official of a Borrower on behalf of the Borrowers, in which case such Borrower shall confirm same by mailing or faxing a written Request for Redesignation of Loans to Agent within 48 hours following the date of redesignation. If Borrowers fail to make a written Request for Redesignation of Loans, Borrowers hereby waive the right to dispute the amount, interest rate or term of any such Eurodollar Loan. (d) Unless the Requisite Banks otherwise consent, the amount of such Loans to be redesignated as a Eurodollar Loan shall be an integral multiple of $250,000. (e) With respect to any redesignation of a Loan as a Eurodollar Loan, at or about 10:00 a.m., Los Angeles time, three (3) Eurodollar Banking Days before the first day of the applicable Eurodollar Period, Agent shall determine the applicable Eurodollar Rate (which determination shall be conclusive in the absence of manifest error) and promptly shall give notice of the same to Borrowers and the Banks by telephone or telecopier. (f) Upon fulfillment of the applicable conditions set forth in Article 8, the redesignation of all or a portion of outstanding Loans as a Eurodollar Loan shall become effective on the first day of the applicable Eurodollar Period. (g) Nothing contained herein shall require any Bank to fund any Eurodollar Loan resulting from redesignation of all or a portion of any of its Prime Rate Loans, in the Designated Eurodollar Market. (h) A request for Redesignation of Loans shall be irrevocable upon receipt by Agent. 2.6 Standby Letters of Credit. (a) Subject to the terms and conditions hereof, at any time and from time to time from the Closing Date through the Banking Day immediately preceding May 31, 2000 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 20 23 Outstanding shall not exceed $30,000,000 and (ii) Outstanding Standby Letters of Credit shall not exceed the Maximum Standby Letter of Credit Amount. Unless 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. (b) Each Request for Standby Letter of Credit shall be submitted to the Issuing Bank not later than 11:00 a.m., Los Angeles time, at least five (5) Banking Days prior to the date upon which the requested Standby Letter of Credit is to be issued and Borrowers shall execute such documents and agreements relating to such Standby Letter of Credit as the Issuing Bank may reasonably require. Upon issuance of a Standby Letter of Credit, the Issuing Bank promptly shall notify Agent and Banks of the amount and terms thereof. The Issuing Bank shall notify Agent and Banks within ten (10) days after the end of each month of all payments, reimbursements, expirations, negotiations, transfers and other activity during that month with respect to outstanding Standby Letters of Credit. (c) Upon the issuance of a Standby Letter of Credit, each Bank shall be deemed to have purchased a pro rata participation therein from the Issuing Bank in a amount equal to that Bank's pro rata share, according to its percentage of the Commitment, of the face amount of the Standby Letter of Credit. Without limiting the scope and nature of each Bank's participation in any Standby Letter of Credit, to the extent that the Issuing Bank has not been reimbursed by Borrowers for any payment required to be made by the Issuing Bank under any Standby Letter of Credit, each Bank shall, pro rata according to its participation, reimburse the Issuing Bank promptly upon demand for the amount of such payment. The obligation of each Bank to so reimburse the Issuing Bank shall be absolute and unconditional and shall not be affected by the occurrence of any Event of Default or any other occurrence or event. Any such reimbursement shall not relieve or otherwise impair the obligation of Borrowers to reimburse the Issuing Bank for the amount of any payment made by the Issuing Bank under any Standby Letter of Credit together with interest as hereinafter provided. (d) Borrowers agree to pay to the Issuing Bank, at its Office designated as the address for notices pursuant to this Agreement, or at such other payment location as the Issuing Bank shall have specified in writing to Borrowers, with respect to each Standby Letter of Credit, within one (1) Banking Day after demand therefor, a principal amount equal to any payment made by the Issuing Bank under that Standby Letter of Credit, together with interest on such amount from 21 24 the date of any payment made by the Issuing Bank through the date of payment by Borrowers at the rate provided for in Section 3.6. The principal amount of any such payment made by Borrowers to the Issuing Bank shall be used to reimburse the Issuing Bank for the payment made by it under the Standby Letter of Credit. Each Bank that has reimbursed the Issuing Bank pursuant to Section 2.6(c) for its pro rata share of any payment made by the Issuing Bank under a Standby Letter of Credit thereupon shall acquire a pro rata participation, to the extent of such reimbursement, in the claim of the Issuing Bank against Borrowers under this Section 2.6(d). (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 $30,000,000, 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. (f) The issuance of any supplement, modification, amendment, renewal or extension to or of any Standby Letter of Credit shall be treated in all respects the same as the issuance of a new Standby Letter of Credit. (g) The obligation of Borrowers to pay to the Issuing Bank the amount of any payment made by the Issuing Bank under any Standby Letter of Credit shall be absolute, unconditional and irrevocable. Without limiting the foregoing, such obligation of Borrowers shall not be affected by any of the following circumstances absent the Issuing Bank's gross negligence or willful misconduct: (i) any lack of validity or enforceability of the Standby Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (ii) any amendment or waiver of or any consent to departure from the Standby Letter of Credit, this Agreement, or any other agreement or instrument relating thereto; (iii) the existence of any claim, setoff, defense or other rights which Borrowers may have at any time against any Bank, any beneficiary of the Standby Letter of Credit (or any Persons or entities for whom any such beneficiary may be acting) or any other Person, whether in connection with the Standby Letter of Credit, this Agreement or any other agreement or instrument relating thereto, or any unrelated transactions; 22 25 (iv) any demand, statement or any other document presented under the Standby Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (v) payment by the Issuing Bank under the Standby Letter of Credit against presentation of a draft or any accompanying document which does not strictly comply with the terms of the Standby Letter of Credit; (vi) the solvency (or insolvency) or financial responsibility (or lack thereof) of any party issuing any documents in connection with a Standby Letter of Credit; (vii) any error in the transmission of any message relating to a Standby Letter of Credit, or any delay or interruption in any such message not caused by the Issuing Bank; and/or (viii) any error, neglect or default of any correspondent of the Issuing Bank in connection with a Standby Letter of Credit. 2.7 Agent's Right to Assume Funds Available for Advances. Unless Agent shall have been notified by any Bank at least two hours prior to the funding by Agent of any Loan that such Bank does not intend to make available to Agent such Bank's portion of the total amount of such Loan, Agent may assume that such Bank has made such amount available to Agent on the date of the Loan and Agent may, in reliance upon such assumption, make available to Borrowers a corresponding amount. If such corresponding amount is not in fact made available to Agent by such Bank, Agent shall be entitled to recover such corresponding amount on demand from such Bank, which demand shall be made in a reasonably prompt manner. If such Bank does not pay such corresponding amount forthwith upon Agent's demand therefor, Agent promptly shall notify Borrowers and Borrowers shall pay such corresponding amount to Agent. Agent also shall be entitled to recover from such Bank or Borrowers, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by Agent to Borrowers to the date such corresponding amount is recovered by Agent, at a rate per annum equal to the actual cost to Agent of funding such amount as notified by Agent to such Bank or Borrowers, as the case may be. Nothing herein shall be deemed to relieve any Bank from its obligation to fulfill its share of the Commitment or to prejudice any rights which the Agent or Borrowers may have against any Bank as a result of any default by such Bank hereunder. ARTICLE 3 PAYMENTS AND FEES 3.1 Principal and Interest. 23 26 (a) Interest shall be payable on the outstanding daily unpaid principal amount of each Loan from the date thereof until payment in full is made and shall accrue and be payable at the rates set forth herein both before and after default and before and after maturity and judgment, with overdue amounts to bear interest at the rate set forth in Section 3.6, to the fullest extent permitted by applicable Law. Upon any partial prepayment or redesignation of outstanding Prime Rate Loans to Eurodollar Loans, interest accrued through the date of such prepayment or redesignation shall be payable on the next following interest payment date occurring pursuant to Section 3.1(b). Upon any partial prepayment or payment in full or redesignation or conversion of any Eurodollar Loan or upon any payment or redesignation in full of all outstanding Prime Rate Loans, interest accrued through the date of such prepayment, payment, redesignation or conversion shall be payable on such date. (b) Interest accrued on each Prime Rate Loan shall be payable on the first day of each month, commencing with the first such date to occur after the Closing Date. Agent shall use its best efforts to notify Borrowers of the amount of interest so payable prior to each interest payment date, but failure of Agent to do so shall not excuse payment of such interest when payable. Except as otherwise provided in Section 3.6, the unpaid principal amount of any Prime Rate Loan shall bear interest at a fluctuating rate per annum equal to the Prime Rate plus the applicable Prime Rate Spread. Each change in the interest rate shall take effect simultaneously with the corresponding change in the Prime Rate and/or the Prime Rate Spread. Each change in the Prime Rate shall be effective as of 12:01 a.m. on the Banking Day on which the change in the Prime Rate is announced, unless otherwise specified in such announcement, in which case the change shall be effective as so specified. (c) Interest accrued on each Eurodollar Loan shall be payable on the first day of each month, commencing with the first such date to occur after the Closing Date, and on the maturity date of that Eurodollar Loan. Agent shall use its best efforts to notify Borrowers of the amount of interest so payable prior to each interest payment date, but failure of Agent to do so shall not excuse payment of such interest when payable. Except as otherwise provided in Section 3.6, the unpaid principal amount of any Eurodollar Loan shall bear interest at a rate per annum equal to the Eurodollar Rate for that Eurodollar Loan plus the Eurodollar Rate Spread. (d) If not sooner paid, the principal indebtedness under this Agreement shall be payable as follows: (i) subject to the right to renew or convert a Eurodollar Rate Loan to a Prime Rate Loan, the principal amount of each Loan shall immediately be payable in Cash on the Maturity Date or, in the case of a Eurodollar Loan, on the last day of the Eurodollar Period for such Loan; and 24 27 (ii) the principal indebtedness evidenced by the Notes shall be payable in Cash within two (2) Banking Days in the amount by which the aggregate outstanding amount of Loans at any time exceeds the Commitment. The outstanding principal indebtedness evidenced by the Notes shall, in any event, be payable on the Maturity Date. (e) The Notes, or any of them, may, at any time and from time to time, be paid or prepaid in whole or in part without premium or penalty, except that (i) any partial prepayment shall be an integral multiple of $100,000, (ii) Agent shall have received notice, by telephone or telecopier, of any prepayment prior to 12:00 noon on the Banking Day of such prepayment (unless greater notice is otherwise required by this Agreement), which notice shall identify the date and amount of the prepayment and the Loan(s) being prepaid, (iii) each prepayment of principal, except for partial prepayments of Prime Rate Loans, shall be accompanied by payment of interest accrued through the date of payment on the amount of principal paid, (iv) except as required by subsections (d)(ii) above, no Eurodollar Loan may be paid or prepaid in whole or in part prior to the last day of the applicable Eurodollar Period without the prior consent of the Requisite Banks, and, notwithstanding such required prepayment or such consent, any payment or prepayment of all or any part of Eurodollar Loan on a day other than the last day of the applicable Eurodollar Period shall be made on a Eurodollar Banking Day, as applicable, shall be preceded by at least four (4) Eurodollar Banking Days' written notice to Agent of the date and amount of such payment or prepayment, and shall be subject to Section 3.3(c). (f) In addition to all other payments hereunder, Borrower shall make mandatory reductions of the outstanding Loans upon the receipt of, and in an amount equal to one hundred percent (100%) of, proceeds in excess of $20,000,000 from either (i) the financing or re-financing of any real property assets of Borrowers or Non-Borrower Affiliates to the extent such proceeds exceed the existing debt associated with the respective real property or (ii) a debt or equity offering; provided, however, that the terms and conditions of such financing or re-financing or debt or equity offering, including the amount and form of the proceeds thereof shall be acceptable to Agent and Requisite Banks. 3.2 Commitment Fee. On the Closing Date, Borrowers shall pay to Banks a commitment fee equal to .125% of the Commitment. Such commitment fee shall be fully earned on the Closing Date. 3.3 Eurodollar Fees and Costs. (a) If, after the date hereof, the existence or occurrence of any Special Eurodollar Circumstance shall, in the reasonable discretion of any Bank, make it unlawful, impossible or impracticable for such Bank or its Eurodollar Lending Office to make or maintain any Eurodollar Loan, or materially restrict the authority of such Bank to purchase or sell, or to take deposits of, dollars in the Designated Eurodollar Market, or to determine or charge interest rates 25 28 based upon the Eurodollar Rate, then such Bank will notify Agent and such Bank's obligation to make Eurodollar Loans shall be suspended for the duration of such illegality, impossibility or impracticability and Agent forthwith shall give notice thereof to the other Banks and Borrowers. Upon receipt of such notice, the outstanding principal amount of such Bank's Eurodollar Loans, together with accrued interest thereon, automatically shall be converted to Prime Rate Loans on either (1) the last day of the Eurodollar Period(s) applicable to such Eurodollar Loans if such Bank may lawfully continue to maintain and fund such Eurodollar Loans to such day(s) or (2) immediately if such Bank may not lawfully continue to fund and maintain such Eurodollar Loans to such day(s), provided that in such event the conversion shall not be subject to payment of a prepayment fee under Section 3.3(c). In the event that such Bank is unable, for the reasons set forth above, to make, maintain or fund any Eurodollar Loan, such Bank shall fund such amount as a Prime Rate Loan, and such amount shall be treated in all respects as a Prime Rate Loan. (b) If, with respect to any proposed Eurodollar Loan: (1) Agent reasonably determines that, by reason of Special Eurodollar Circumstances, deposits in dollars (in the applicable amounts) are not being offered to each of the Banks in the Designated Eurodollar Market for the applicable Eurodollar Period; or (2) the Requisite Banks advise Agent that the Eurodollar Rate as determined by the Banks (i) does not represent the effective pricing to the Banks for deposits in dollars in the Designated Eurodollar Market in the relevant amount for the applicable Eurodollar Period, or (ii) will not adequately and fairly reflect the cost to such Banks of making the applicable Eurodollar Loans; then Agent forthwith shall give notice thereof to Borrowers and the Banks, whereupon until Agent notifies Borrowers that the circumstances giving rise to such suspension no longer exist, and the obligation of the Banks to make any future Eurodollar Loans shall be suspended. (c) Upon payment or prepayment of any Eurodollar Loan, or conversion of a Eurodollar Loan to a Prime Rate Loan (other than as the result of a conversion required under Section 3.3(a)), on a day other than the last day in the applicable Eurodollar Period (whether voluntarily, involuntarily, by reason of acceleration, or otherwise), Borrowers shall pay to the Banks an amount equal to the accrued interest on the amount prepaid plus a prepayment fee equal to the amount (if any) by which: (1) the additional interest which would have been payable on the amount prepaid had it not been paid until the last day of the Eurodollar Period, exceeds (2) the interest which would have been recoverable by placing the amount prepaid on deposit in the Eurodollar market for a period starting on the date on which it was prepaid and ending on the last day of the Eurodollar Period for such portion, plus all reasonable out-of-pocket expenses incurred by Banks and reasonably attributable to such payment or prepayment; provided that no prepayment fee shall be payable (and no credit or rebate shall be required) if the product of the foregoing formula is not 26 29 positive. Each Bank's determination of the amount of any prepayment fee payable under this Section 3.3(c) shall be conclusive in the absence of manifest error. (d) Borrowers hereby indemnify each Bank against, and agree to hold each Bank harmless from and reimburse each Bank on demand for, all reasonable costs, expenses, claims, penalties, liabilities, losses, legal fees and damages (including, without limitation, any interest paid by any Bank for deposits in dollars in the Designated Eurodollar Market and any loss sustained by any Bank in connection with the reemployment of funds) incurred or sustained by such Bank, as reasonably determined by such Bank, as a result of any failure of Borrowers to borrow on the date or in the amount specified in any Request for Loan or Request for Redesignation of Loans; provided that such Bank shall not be entitled to indemnification for any loss caused by its own gross negligence or willful misconduct. The determination of such amount by each Bank shall be conclusive in the absence of manifest error. (e) Any Bank requesting any payment from Borrowers under this Section 3.3, shall, at the request of Borrowers, provide reasonable detail to Borrowers regarding the manner in which the amount of any such payment has been determined. 3.4 Letter of Credit Fees. Borrowers shall pay to the Issuing Bank a letter of credit fee of 1.5% of the face amount of the Standby Letter of Credit for the term of each Standby Letter of Credit issued under Section 2.6, payable at the time of issuance. Each Standby Letter of Credit fee is earned upon issuance of each Standby Letter of Credit and is nonrefundable. The Issuing Bank promptly shall make available to Agent in immediately available funds, and Agent promptly shall make available to Banks in immediately available funds, pro rata according to their percentages of the Commitment, the portion of each Standby Letter of Credit fee which is for the account of Banks as aforesaid. 3.5 Agent Fee. From time to time hereafter, Borrowers shall pay fees to Agent as agreed between Borrowers and Agent in a separate agreement. 3.6 Late Payments/Default Rate. (a) Should any installment of principal or interest or any fee or cost or other amount payable under any Loan Document to Agent or any Bank not be paid when due, such installment shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to two percent (2.0%) above the then prevailing applicable Prime Rate based interest rate for all Loans made hereunder, to the fullest extent permitted by applicable Law. Accrued and unpaid interest on past due amounts (including, without limitation, interest on past due interest) shall be compounded monthly, on the last day of each calendar month, to the fullest extent permitted by applicable Law and payable on the first day of the following month. 27 30 (b) Upon the occurrence and during the continuance of any other Event of Default, at the option of the Requisite Banks, Borrowers shall pay interest on the outstanding principal and interest at the Default Rate. This shall not constitute a waiver of any Event of Default. 3.7 Computation of Interest and Fees. All computations of interest and fees under any Loan Document that relate to any Prime Rate Loan or any Eurodollar Loan shall be calculated on the basis of a year of 360 days and the actual number of days elapsed. 3.8 Non-Banking Days. If any payment to be made by Borrowers or any other Party under any Loan Document shall come due on a day other than a Banking Day (and a Eurodollar Banking Day, in the case of a Eurodollar Loan), payment shall be made on the next succeeding Banking Day (and, in the case of a Eurodollar Loan, the next succeeding Eurodollar Banking Day that is also a Banking Day) and the extension of time shall be reflected in computing interest. 3.9 Manner and Treatment of Payments. (a) Borrowers agree that interest and principal payments and any fees will be deducted automatically on the due date from the Designated Deposit Account, or any other accounts of Borrowers held by Agent which contain sufficient funds. Such debits shall occur on the dates the payments become due. If the due date does not fall on a Banking Day, Agent will cause such debits to be made on the first Banking Day following the due date. Borrowers shall maintain sufficient funds in the Designated Deposit Account on the dates Agent enters debits authorized by this Agreement. If there are insufficient funds in the Designated Deposit Account or the other accounts of Borrowers on the date Agent enters any debit authorized by this Agreement, Borrowers shall immediately, after notice from Agent, pay such shortfall to Agent. The amount of all payments received by Agent for the account of each Bank shall be immediately paid by Agent to the applicable Bank in immediately available funds. All payments shall be made in lawful money of the United States of America. (b) Each Bank shall use its best efforts to keep a record of Loans made by it and payments received by it with respect to each Note and such record shall be presumptive evidence of the amounts owing. (c) Each payment or prepayment on account of any Loan shall be made and applied pro rata according to the outstanding Loans made by each Bank. (d) Each payment of any amount payable by Borrowers and/or any other Party under this Agreement and/or any other Loan Document shall be made free and clear of, and without reduction by reason of, any taxes, assessments or other charges imposed by any Governmental Agency, central bank or comparable authority. 28 31 3.10 Funding Sources. Nothing in this Agreement shall be deemed to obligate Agent or any Bank to obtain the funds for any Loan in any particular place or manner or to constitute a representation by Agent or any Bank that it has obtained or will obtain the funds for any Loan in any particular place or manner. 3.11 Failure to Charge Not Subsequent Waiver. Any decision by Agent or any Bank not to require payment of any interest (including default interest), fee, cost or other amount payable under any Loan Document on any occasion shall in no way limit or be deemed a waiver of Agent's or such Bank's right to require full payment of any interest (including default interest), fee, cost or other amount payable under any Loan Document on any other or subsequent occasion. 3.12 Agent's Right to Assume Payments Will be Made by Borrowers. Unless Agent shall have been notified by Borrowers prior to the date on which any payment to be made by Borrowers hereunder is due that Borrowers do not intend to remit such payment, Agent may, in its discretion, assume that Borrowers will make such payment when so due and Agent may, in its discretion and in reliance upon such assumption, make available to each Bank on such payment date an amount equal to such Bank's share of such assumed payment. If Borrowers do not in fact make such payment to Agent, each Bank shall forthwith on demand repay to Agent the amount of such assumed payment made available to such Bank, together with interest thereon in respect of each day from and including the date such amount was made available by Agent to such Bank to the date such amount is repaid to Agent at a rate per annum equal to the actual cost to Agent of funding such amount as notified by Agent to such Bank. 3.13 Survivability. All of Borrowers' obligations under this Article 3 shall survive for one year following the date on which all Loans hereunder are fully paid. 3.14 Unused Line Fee. On the last day of each calendar quarter, commencing with the first such date to occur after the Closing Date, Borrower shall pay to Banks a fee of .25% per annum based on the difference between the Commitment and an amount equal to the weighted average Total Outstanding during the previous quarterly period or portion thereof. ARTICLE 4 REPRESENTATIONS AND WARRANTIES Borrowers represent and warrant to Agent and each Bank, as of the Closing Date, that: 4.1 Existence and Qualification; Power; Compliance With Laws. 29 32 (a) SCC, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of Delaware. The chief executive offices of SCC, Inc. are in Los Angeles, California. (b) The Spectrum Club Company, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (c) Pontius Realty, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (d) Sports Club, Inc. of California is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (e) Irvine Sports Club, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (f) The SportsMed Company, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (g) SCC Sports Club, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of Texas. Its chief executive offices are in Los Angeles, California. (h) L.A./Irvine Sports Clubs, Ltd. is a limited partnership duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. (i) Talla New York, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of New York. Its chief executive offices are in Los Angeles, California. (j) Green Valley Spectrum Club, Inc. is a corporation duly formed, validly existing and in good standing under the Laws of Nevada. Its chief executive offices are in Los Angeles, California. (k) Spectrum Club/Anaheim is a corporation duly formed, validly existing and in good standing under the Laws of California. Its chief executive offices are in Los Angeles, California. 30 33 Each Borrower is duly qualified or registered to transact business and is in good standing in each other jurisdiction in which the conduct of its business or the ownership or leasing of its Properties makes such qualification or registration necessary, except where the failure so to qualify or register and to be in good standing would not have a material adverse effect on the business, operations or condition (financial or otherwise) of such Borrower and its Subsidiaries, taken as a whole. Each Borrower has all requisite power and authority to conduct its business, to own and lease its Properties and to execute, deliver and perform all of its Obligations under the Loan Documents. All outstanding shares of capital stock of each Borrower, as applicable, are duly authorized, validly issued, fully paid, non-assessable and issued in compliance with all applicable state and federal securities and other Laws. Each Borrower is in compliance with all Laws and other legal requirements applicable to its business, has obtained all authorizations, consents, approvals, orders, licenses and permits from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business, except where the failure so to comply, file, register, qualify or obtain exemptions would not have a material adverse effect on the business, operations or condition (financial or otherwise) of such Borrower and its Subsidiaries, taken as a whole. 4.2 Authority; Compliance With Other Agreements and Instruments and Government Regulations. The execution, delivery and performance by each Borrower and its Subsidiaries of the Loan Documents to which it is a Party have been duly authorized by all necessary action, and do not and will not: (a) Except as set forth in Schedule 4.2, require any consent or approval not heretofore obtained of any partner, director, stockholder, security holder or creditor; (b) Violate or conflict with any provision of such Party's partnership agreement, certificate of limited partnership, charter, articles of incorporation or bylaws, or amendments thereto, as applicable; (c) Result in or require the creation or imposition of any Lien or Right of Others (other than as provided under the Loan Documents) upon or with respect to any Property now owned or leased or hereafter acquired by such Party; (d) Violate any provision of any Law (including, without limitation, Regulations T, U and/or X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect and having applicability to such Party; or (e) Result in a breach of or constitute a default under, or cause or permit the acceleration of any obligation owed under, any indenture or loan or credit agreement or any other 31 34 material agreement, lease or instrument to which such Party is a party or by which such Party or any of its Property is bound or affected; and no Borrower nor any Subsidiary thereof is in default under any Law, order, writ, judgment, injunction, decree, determination or award, or any indenture, agreement, lease or instrument described in this Section 4.2(e), in any respect that is materially adverse to the interests of Agent or any Bank or that would have any material adverse effect on the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole. 4.3 No Governmental Approvals Required. No authorization, consent, approval, order, license or permit from, or filing, registration or qualification with, or exemption from any of the foregoing from, any Governmental Agency is or will be required to authorize or permit under applicable Law the execution, delivery and performance by any Borrower or any Subsidiary thereof of the Loan Documents to which it is a Party. 4.4 Subsidiaries. (a) Except as described in Schedule 4.4, Borrowers do not own any capital stock, partnership interest, joint venture interest or other equity interest in any Person. Unless otherwise indicated in Schedule 4.4 all of the outstanding shares of capital stock or partnership or joint venture interests of each Borrower are owned of record and beneficially by Borrowers and all securities and interests so owned are duly authorized, validly issued, fully paid, non-assessable and issued in compliance with all applicable state and federal securities and other Laws, and are free and clear of all Liens and Rights of Others. (b) Each Subsidiary identified in Schedule 5.2 as an "Inactive Subsidiary" has (i) aggregate collections or distributions of cash from its operations of less than $50,000 and (ii) no tangible or intangible real or personal property assets having an aggregate fair market value in excess of $50,000. (c) Each Subsidiary of each Borrower is a legal entity of the form described for that Subsidiary in Schedule 4.4, duly formed, validly existing and in good standing under the Laws of its jurisdiction of formation, is duly qualified or registered to transact business and is in good standing in each other jurisdiction in which the conduct of its business or the ownership or leasing of its Properties makes such qualification or registration necessary, except where the failure so to qualify or register and to be in good standing does not have a material adverse effect on the business, operations or condition (financial or otherwise) of the Borrowers and their Subsidiaries, taken as a whole, and has all requisite legal power and authority to conduct its business and to own and lease its Properties and to execute, deliver and perform all of its Obligations under the Loan Documents. 32 35 (d) Each Subsidiary of each Borrower is in compliance with all Laws and other legal requirements applicable to its business, has obtained all authorizations, consents, approvals, orders, licenses and permits from, and has accomplished all filings, registrations and qualifications with, or obtained exemptions from any of the foregoing from, any Governmental Agency that are necessary for the transaction of its business, except where the failure to so comply, file, register, qualify or obtain exemptions would not have a material adverse effect on the business, operations or condition (financial or otherwise) of the Borrowers and their Subsidiaries, taken as a whole. 4.5 Financial Statements. Borrowers have furnished to Agent and Banks (a) the audited consolidated balance sheet of Borrowers and their Subsidiaries as at December 31, 1997, and audited consolidated income statement and cash flow statement of Borrowers and their Subsidiaries for their fiscal year then ended, and (b) the unaudited consolidated balance sheets of Borrowers and their Subsidiaries as at September 30, 1998, and unaudited consolidated income statements, cash flow statements of Borrowers and their Subsidiaries and unaudited individual Club operating statements for such month and for the portion of their fiscal year ended with such month. Such financial statements fairly present the financial condition, results of operations and cash flow of Borrowers and their Subsidiaries as at such dates and for such periods, in conformity with generally accepted accounting principles, consistently applied, provided that the balance sheets and statements referred to in (b) above are subject to normal year-end audit adjustments. 4.6 No Other Liabilities; No Material Adverse Changes. Except as set forth in Schedule 4.6 hereto, Borrowers and their Subsidiaries do not have any material liability or material contingent liability not reflected or disclosed in the financial statements or notes thereto described in Section 4.5. There has been no material adverse change in the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, since the date of the financial statements described in Section 4.5(b). 4.7 Intangible Assets. Borrowers and their Subsidiaries own, or possess the unrestricted right to use, all trademarks, trade names, copyrights, patents, patent rights, licenses and deferred tax assets that are used in the conduct of their businesses as now operated, and no such intangible asset, to the best knowledge of Borrowers, conflicts with the valid trademark, trade name, copyright, patent, patent right or deferred tax asset of any other Person to the extent that such conflict would have a material adverse effect on the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole. 4.8 Filing of Financing Statements. Upon the filing and/or recording of financing statements describing the Collateral with the Governmental Agencies listed in Schedule 4.8, and except for the requirement that continuation statements periodically be filed and/or recorded with respect thereto, and upon the taking of possession of the stock certificates of any and all Borrowers, other than SCC, Inc., all necessary steps will have been taken to fully perfect and to maintain fully 33 36 perfected the Liens of Agent and Banks on the Collateral, to the fullest extent that such Liens may be perfected pursuant to Article 9 of the Uniform Commercial Code. 4.9 Public Utility Holding Company Act. No Borrower or any Subsidiary thereof is a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 4.10 Litigation. Except for (a) the matters set forth in Schedule 4.10, (b) any matter fully covered as to subject matter and amount (subject to applicable deductibles and retentions) by insurance for which the insurance carrier has not asserted lack of subject matter coverage or reserved its right to do so, or (c) any matter, or series of related matters, involving a threatened claim against Borrowers of less than $100,000, there are no actions, suits or proceedings pending or, to the best knowledge of Borrowers, threatened against or affecting Borrowers or any of its Subsidiaries or any Property of any of them in any court of Law or before any Governmental Agency. 4.11 Binding Obligations. Each of the Loan Documents to which any Borrower or any Subsidiary thereof is a Party will, when executed and delivered by such Party, constitute the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms. 4.12 No Default. No event has occurred and is continuing that is a Default. 4.13 ERISA. (a) Except as disclosed in Schedule 4.13, there are no Plans. (b) With respect to each Plan: (1) such Plan complies in all material respects with ERISA and any other applicable Law; (2) such Plan has not incurred any material "accumulated funding deficiency", as that term is defined in Section 302 of ERISA; (3) no "reportable event" (as defined in Section 4043 of ERISA) has occurred that could result in the termination or disqualification of such Plan; and (4) no Borrower nor any Subsidiary thereof has engaged in any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1954, as amended). 34 37 (c) no Borrower nor any Subsidiary thereof is or has been a party to any Multi employer Plan. (d) Borrowers and their Subsidiaries are in compliance with each covenant contained in Section 6.6. 4.14 Regulations T, U and X; Investment Company Act. No Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" any "margin stock" or "margin security" within the meanings of Regulations T, U or X, respectively, of the Board of Governors of the Federal Reserve System. If requested by Agent or any Bank, Borrowers will furnish or will cause their Subsidiaries, as requested, to furnish Agent or any Bank with a statement or statements in conformity with the requirements of Federal Reserve Form U-1 referred to in Regulation U of said Board of Governors. No part of the proceeds of any Loan hereunder will be used to purchase or carry any such "margin security" or "margin stock" or to extend credit to others for the purpose of purchasing or carrying any such "margin security" or "margin stock" in violation of Regulations T, U or X of said Board of Governors. No Borrower nor any of its Subsidiaries is or is required to be registered under the Investment Company Act of 1940. 4.15 Disclosure. No written statement made by Borrowers or any Subsidiary thereof to Agent or any Bank in connection with this Agreement, or in connection with any Loan, or in connection with the issuance of any Standby Letter of Credit, contains any untrue statement of a material fact or omits a material fact necessary to make the statement made not misleading. To the best knowledge of Borrowers, there is no fact which Borrowers have not disclosed to Agent and Banks in writing which materially and adversely affects nor, so far as Borrowers can now foresee, is reasonably likely to prove to affect materially and adversely the business, operations, Properties, prospects, profits or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, or the ability of Borrowers and their Subsidiaries to perform their Obligations under the Loan Documents. 4.16 Tax Liability. Borrowers and their Subsidiaries have filed all income tax returns which are required to be filed, and have paid, or made provision for the payment of, all taxes which have become due pursuant to said returns or pursuant to any assessment received by any Borrower or any Subsidiary thereof, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. 4.17 Projections. The financial projections set forth in Schedule 4.17 are based on facts known to Borrowers and on assumptions that are reasonable and consistent with such facts. To the best knowledge of Borrowers, except as may be disclosed on Schedule 4.17, no material fact or assumption is omitted as a basis for such projections, and such projections are reasonably based on 35 38 such facts and assumptions. Nothing in this Section 4.17 shall be construed as a representation that such projections in fact will be achieved. 4.18 Fiscal Year. Borrowers and their Subsidiaries each operate on a fiscal year corresponding to the calendar year and ending on December 31, the fiscal months of which correspond to the calendar months of the calendar year. 4.19 Employee Matters. There is no strike, work stoppage or labor dispute with any union or group of employees pending or overtly threatened involving Borrowers or any of their Subsidiaries. Since June 1996, there has been no increase in the salary, bonus or other compensation arrangements of the employees of Borrowers and their Subsidiaries other than normal increases in the ordinary course of business. ARTICLE 5 AFFIRMATIVE COVENANTS (OTHER THAN INFORMATION AND REPORTING REQUIREMENTS) So long as any Loan or any other indebtedness owing in connection therewith remains unpaid hereunder or any portion of the Commitment remains outstanding, Borrowers shall, and shall cause each of its Subsidiaries to, unless the Requisite Banks otherwise consent in writing: 5.1 Payment of Taxes and Other Potential Charges. Pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon any of them, upon their respective Property or any part thereof, upon their respective income or profits or any part thereof or upon any right or interest of Agent or any Bank under any Loan Document, except that Borrowers and their Subsidiaries shall not be required to pay or cause to be paid (a) any income or gross receipts tax generally applicable to banks or (b) any tax, assessment, charge or levy that is not yet past due, or is being contested in good faith by appropriate proceedings, so long as the relevant entity has established and maintains adequate reserves for the payment of the same and by reason of such nonpayment and contest no material item or portion of Property of Borrowers and their Subsidiaries, taken as a whole, is in jeopardy of being seized, levied upon or forfeited. 5.2 Preservation of Existence. Preserve and maintain their respective existences, except for mergers permitted in Section 6.3 of this Agreement. Preserve and maintain all material licenses, rights, franchises and privileges in the jurisdiction of their formation and all authorizations, consents, approvals, orders, licenses, permits, or exemptions from, or registrations with, any Governmental Agency that are necessary for the transaction of their respective business. Qualify and remain qualified to transact business in each jurisdiction in which such qualification is necessary in view of their respective business, except any Subsidiaries listed in Schedule 5.2 that are 36 39 inactive or have immaterial assets. With respect to any Subsidiaries listed in Schedule 5.2 that are inactive or have immaterial assets, Borrowers shall immediately give Agent and Banks written notice of any change in such entities' respective existences or statuses of qualification. 5.3 Maintenance of Properties. Maintain, preserve and protect all of their respective Properties and equipment in good order and condition, subject to replacement wear and tear in the ordinary course of business, and not permit any waste of their respective Properties, except that the failure to maintain, preserve and protect a particular item of Property or equipment that is not of significant value, either intrinsically or to the operations of Borrowers and their Subsidiaries, taken as a whole, shall not constitute a violation of this covenant. 5.4 Maintenance of Insurance. Maintain liability and casualty insurance with responsible insurance companies acceptable to the Requisite Banks in such amounts and against such risks as is usually carried by responsible companies engaged in similar businesses and owning similar Properties in the general areas in which Borrowers and their Subsidiaries operate; and, as requested by the Agent, cause Agent and Banks to be designated as additional insured and loss payees with respect to such insurance, and obtain the written agreement of such insurers that such insurance shall not be canceled or terminated, nor shall the coverage or terms or exclusions thereof be materially modified, without at least thirty (30) days prior written notice to Agent. 5.5 Compliance With Laws. Comply with the requirements of all applicable Laws and orders of any Governmental Agency, noncompliance with which could materially adversely affect the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, except that Borrowers and their Subsidiaries need not comply with a requirement then being contested by any of them in good faith by appropriate proceedings so long as no interest of Agent or any Bank would be materially impaired thereby. 5.6 Additional Borrowers. In the event (i) the aggregate amount of all advances to, investments in or commitments to any Non-Borrower Affiliate by Borrowers, after the date hereof, exceeds at any time $200,000, in addition to the amounts set forth for the Non-Borrower Affiliates in Schedule 5.6, but excluding accrued management fees owing to Borrowers from such Non-Borrower Affiliates, (ii) any Non-Borrower Affiliate identified in Schedule 5.2 ceases to meet the criteria for an "Inactive Subsidiary" set forth in Section 4.4(b) of this Agreement, (iii) any Borrower becomes a majority shareholder or a general partner of any Non-Borrower Affiliate now or hereafter existing, or (iv) any Borrower or Borrowers, taken as a whole, obtain a majority of the partnership or other ownership interests of any Non-Borrower Affiliate, Borrowers shall cause such Non-Borrower Affiliate to become a Borrower hereunder or enter into such other agreement or arrangement with Banks concerning such Non-Borrower Affiliate as may be acceptable to the Requisite Banks in its sole discretion. In order to add a Non-Borrower Affiliate as a Borrower hereunder, the Borrowers shall deliver to Agent and Banks (a) the agreement of such Non-Borrower Affiliate to be added as a Borrower hereunder and to be bound by the terms hereof, (b) the 37 40 agreement of the owners of all capital stock or other ownership interests, as applicable, of such new Borrower to become a party to the Pledge Agreement, (c) the certificates and other documents required to be delivered pursuant to the terms of the Pledge Agreement, and (d) such other documents as the Requisite Banks may reasonably require. Schedule 5.6 attached hereto sets forth as of the date hereof the amount of all advances to, investments in or commitments to any Non-Borrower Affiliate by Borrowers, the percentage ownership of each Borrower in any Non-Borrower Affiliate, and Borrowers which are general partners of any Non-Borrower Affiliate. 5.7 Inspection Rights. Upon reasonable notice by Agent or any Bank to Borrowers, at any time during regular business hours and as reasonably requested, permit Agent or any Bank, or any employee, agent or representative thereof, to examine, audit and make copies and abstracts from the records and books of account and to visit and inspect the Properties of Borrowers and their Subsidiaries and to discuss the affairs, finances and accounts of Borrowers and their Subsidiaries with any of their officers and key employees, customers or vendors, and, upon request, furnish promptly to Agent or any Bank true copies of all financial information and internal management reports made available to the senior management of Borrowers or any of their Subsidiaries. If any of Borrowers' Property, books or records are in the possession of a third party, Borrowers, upon not less than three (3) days' advance notice, hereby authorize such third party to permit Agent or Banks to have access to perform inspections or audits and to respond to Agent's or a Bank's request for information concerning such Property, books or records. If an Event of Default has occurred and is continuing, no advance notice of any audits and inspections shall be required. 5.8 Keeping of Records and Books of Account. Keep adequate records and books of account reflecting all financial transactions in conformity with generally accepted accounting principles, consistently applied, and in material conformity with all applicable requirements of any Governmental Agency having regulatory jurisdiction over Borrowers or any of their Subsidiaries. 5.9 Compliance With Agreements, Duties and Obligations. Promptly and fully comply with all their respective agreements, duties and obligations under the Loan Documents, and with material terms of any other material agreements, indentures, leases and/or instruments to which any one or more of them is a party, whether such other agreements, indentures, leases and/or instruments are with Agent and any Bank or another Person. 5.10 Use of Proceeds. Use the proceeds of the Loans for the following purposes only: (i) for working capital purposes; (ii) for Capital Expenditures; (iii) for Standby Letters of Credit; (iv) to fund non-hostile Acquisitions; and (v) to fund New Club Developments. ARTICLE 6 NEGATIVE COVENANTS 38 41 So long as any Loan or other indebtedness owing in connection therewith remains unpaid hereunder or any portion of the Commitment remains outstanding, Borrowers shall not (and shall cause each of their Subsidiaries to not) unless the Requisite Banks otherwise consent in writing: 6.1 Disposition of Property. Sell, assign, exchange, transfer, lease or otherwise dispose of, or contract to sell, assign, exchange, transfer, lease or otherwise dispose of, any of their respective Properties, whether now owned or hereafter acquired, and whether to an Affiliate or otherwise, except (a) Properties sold, assigned, exchanged, transferred, leased or otherwise disposed of in the ordinary course of business, and (b) as permitted under Section 6.3. 6.2 Transactions with Borrowers and Non-Borrower Affiliates. Advance funds to, guarantee obligations of, or make any other investments in or commitments or make distributions to any Non-Borrower Affiliate unless (a) such Non-Borrower Affiliate is made a Borrower under this Agreement or some other arrangement acceptable to the Requisite Banks in their sole discretion is made in accordance with Section 5.6, or (b) the aggregate amount of all advances to, guaranties of, investments in and commitments to all Non-Borrower Affiliates does not exceed $200,000, in addition to the amounts set forth for the Non-Borrower Affiliates in Schedule 5.6, but excluding accrued management fees owing to Borrowers from such Non-Borrower Affiliates, Borrowers shall provide Agent and Banks a monthly report detailing such transactions, such report to be in a form as is acceptable to Agent and Requisite Banks. The Borrowers shall have the right, with the consent of the Requisite Banks, not to be unreasonably withheld but subject to such terms and conditions as the Requisite Banks may require, to add any Non-Borrower Affiliate as a Borrower hereunder. 6.3 Mergers, Acquisitions and New Club Developments. (a) Merge, consolidate or amalgamate with or into any Person, except mergers, consolidations or amalgamations of a Subsidiary of a Borrower into a Borrower (with such Borrower as the surviving entity) prior notice of the details of which shall have been given to Agent and Banks, or mergers, consolidations or amalgamations in connection with an Acquisition or New Club Development permitted pursuant to Section 6.3(b) or 6.3(c). (b) Make any Acquisition or enter into any agreement to make any Acquisition, provided that the consent of the Requisite Banks shall not be required in connection with any Acquisition satisfying the following conditions: (i) such Acquisition requires payment of an amount of less than either (A) $10,000,000 of total consideration in connection with such Acquisition alone or (B) $15,000,000 of total consideration when such Acquisition is combined with all other Acquisitions made by Borrowers during the twelve months prior to such Acquisition, excluding Borrowers' investment in the Vertical Club and Borrowers' investment in any Acquisition previously approved by the Requisite Banks, (ii) such Acquisition is not for a sum greater than seven and one-half times the EBITDA of the acquired entity, with adjustments acceptable to Banks for identifiable savings which will occur as a result of such Acquisition, or (iii) such Acquisition is 39 42 not of an entity engaged in a business different from that of Borrowers. In connection with an Acquisition meeting the above requirements, the Borrowers may enter into a partnership or a corporate or other joint venture with one or more unaffiliated Persons. (c) Pursue any New Club Development, provided that the consent of the Requisite Banks shall not be required for a New Club Development satisfying the following conditions: (i) such New Club Development is projected to generate positive EBITDA for the twelve-month period commencing on the first anniversary following completion of such New Club Development; and (ii) Borrowers do not expend more than $5,000,000 on such New Club Development alone or more than $10,000,000 when the expenditures for such New Club Development are combined with all other New Club Development expenditures during the twelve months prior to the commencement of such New Club Development, exclusive of expenditures in connection with existing development projects already approved by Banks, including those development projects described on Schedule 6.3(c). (d) In any event, no more than three mergers, Acquisitions or New Club Developments in the "pre sale phase of development" shall be pursued at any given time. "Pre sale phase of development" shall mean the period during which memberships in the new Clubs are offered for sale prior to the date the Club opens for business. (e) Prior to any Acquisition, Borrowers shall deliver to Agent and Banks (i) an executive summary of the Acquisition in form and substance acceptable to Agent and Banks, (ii) a multi-year financial forecast, including assumptions, (iii) a pro forma financial statement giving effect to the proposed Acquisition, (iv) a pro forma compliance certificate executed by a Responsible Official of a Borrower certifying that giving effect to the proposed Acquisition, Borrowers shall be in compliance with the terms of this Section 6.3 and all other terms and financial covenants set forth in this Agreement, (v) a schedule of sources and uses of funds, and (vi) such other details about such Acquisition as Agent or any Bank may reasonably request. Prior approval by the Requisite Banks shall be required for every Acquisition other than those permitted under Section 6.3(b) above. (f) Prior to any New Club Development, Borrowers shall deliver to Agent and Banks (i) an executive summary detailing the development project, demographic and site analysis, cost estimates and financing sources, (ii) a multi-year financial forecast, including assumptions, demonstrating positive projected EBITDA for the twelve-month period commencing on the first anniversary following completion of such New Club Development, (iii) a pro forma compliance certificate executed by a Responsible Officer of a Borrower certifying that giving effect to the proposed development, Borrowers shall be in compliance with the terms of this Section 6.3 and all other terms and financial covenants set forth in this Agreement, and (iv) such other details about such development as Agent or any Bank may reasonably request. Prior approval by the Requisite 40 43 Banks shall be required for every New Club Development other than those permitted under Section 6.3(c) above. (g) Banks acknowledge prior receipt of a request from Borrowers for funding an amount not to exceed $10,000,000 in connection with the purchase of land and a building by The Spectrum Club Company, Inc. and its development as a new Spectrum Club in Thousand Oaks, California (the "Thousand Oaks Club"). Funding for the Thousand Oaks Club New Club Development has been approved subject to the following: (i) the occurrence of no material adverse change with respect to Borrowers or the proposed Acquisition and no Default having occurred prior to such funding or which would occur as a result of such funding; and (ii) such other evidence of full compliance with all other terms and conditions of this Agreement as Agent or any Bank shall reasonably request both before and after such Acquisition. (h) Concurrent with the execution and delivery of this Agreement, Banks acknowledge receipt of a request from Borrowers to permit Borrowers to make a net investment not to exceed $24,000,000 for the Acquisition and development of the Vertical Club in New York City. In connection with such request, Borrowers have provided Banks with the information package attached hereto as Exhibit F (the "Vertical Club Materials"). Banks have approved Borrowers' Acquisition and development of the Vertical Club subject to the following: (i) the occurrence of no material adverse change with respect to Borrowers or the proposed Acquisition and development from the information reflected in the Vertical Club Materials, and no Default having occurred prior to such funding or which would occur as a result of such funding; (ii) Borrowers' adherence to the budgets and time lines provided in the Vertical Club Materials, as such budgets and time lines may be refined in the quarterly project development status reports delivered by Borrowers to Agent pursuant to Section 7.1(n) hereof, with material modifications approved by Banks; and (iii) such other evidence of full compliance with all other terms and conditions of this Agreement as Agent or any Bank shall reasonably request both before and after such Acquisition. (i) Concurrent with the execution and delivery of this Agreement, Banks acknowledge receipt of a request from Borrowers to permit Borrowers to make a net investment not to exceed $20,800,00 for a New Club Development of a Sports Club in Houston (the "Houston 41 44 Sports Club"). In connection with such request, Borrowers have provided Banks with the information package attached hereto as Exhibit G (the "Houston Sports Club Materials"). Banks have approved Borrowers' development of the Houston Sports Club subject to the following: (A) the occurrence of no material change with respect to Borrowers or the proposed development from the information reflected in the Houston Sports Club Materials, and no default having occurred prior to such funding or which would occur as a result of such funding; (B) Borrowers' adherence to the budgets and time lines provided in the Houston Sports Club Materials, as such budgets and time lines may be refined in the quarterly project development status reports delivered by Borrower to Agent pursuant to Section 7.1(n) hereof, with material modifications approved by Banks; and (C) such other evidence of full compliance with all other terms and conditions of this Agreement as Agent or any Bank shall reasonably request both before and after such development. (j) Notwithstanding the right of Borrowers' pursuant to Section 6.3(b) and (c) above to make certain Acquisitions or pursue certain New Club Developments without obtaining the prior consent of the Requisite Banks, Borrowers shall notify Agent of, or submit to Agent a formal request for approval of, as applicable, any and all intended Acquisitions or New Club Developments prior to entering into a definitive purchase agreement, in the case of any intended Acquisition, or, in the case of any intended New Club Development, upon the earlier of (i) the approval of such New Club Development by the Board of Directors of the applicable Borrower or (ii) the applicable Borrower's execution of any contract or expenditure of any money which would financially obligate such Borrower to proceed with such New Club Development. 6.4 Profitability. Fail to maintain on a combined basis a positive net income after taxes and extraordinary items on a quarterly basis except as a result of Borrowers' payment of the prepayment penalty in connection with the prepayment of their financing obligations to AT&T Commercial Finance Corporation. 6.5 Redemption, Dividends and Distributions; Payments to Partners. Redeem or repurchase stock or partnership interests, declare or pay any dividends or make any other distribution, whether of capital, income or otherwise, and whether in Cash or other Property, except that, subject to applicable statutory restrictions and provided no Event of Default exists or would exist after such action, (a) any Borrower or Subsidiary of a Borrower may, subject to Section 6.2, declare and pay dividends or make distributions directly or indirectly to another Borrower, (b) SCC, Inc. may make a Qualified Stock Repurchase, (c) Borrowers and Subsidiaries may, subject to Section 6.2, pay partner distributions as required under the partnership agreements as currently in effect as of the date hereof, or with such amendments as are approved in writing by the Requisite Banks, of 42 45 L.A./Irvine Sports Clubs, Ltd., El Segundo TDC, Ltd., Sports Connection-ES/MB and Reebok-Sports Club/NY or any other entity approved in writing by the Requisite Banks pursuant to Section 5.6 of this Agreement, (d) Borrowers and Subsidiaries may declare or make operating distributions or declare or pay dividends or make distributions in connection with the purchase of partnership interests in L.A./Irvine Sports Clubs, Ltd., El Segundo TDC, Ltd., Sports Connection-ES/MB and/or Reebok-Sports Club/NY or any other entity approved in writing by the Requisite Banks pursuant to Sections 5.6 and 6.2 of this Agreement, and (e) The SportsMed Company, Inc. and/or HFA Services, Inc. shall have the right to repurchase securities pursuant to the terms of the Shareholders Agreements previously entered into by HFA Services, Inc., copies of which Shareholders Agreements have been delivered to Banks, as such Shareholders Agreements are currently in effect as of the date hereof, or with such amendments as are approved in writing by the Requisite Banks, provided that The SportsMed Company, Inc. and/or HFA Services, Inc. shall not expend more than $750,000 in the aggregate during the term of this Agreement in connection with such repurchases of securities. 6.6 ERISA. (a) At any time, maintain, or be or become obligated to contribute on behalf of its employees to, any Plan, other than those Plans disclosed in Schedule 4.13. (b) At any time, permit any Plan to: (1) engage in any "prohibited transaction", as such term is defined in Section 4975 of the Internal Revenue Code of 1954, as amended; (2) incur any material "accumulated funding deficiency", as that term is defined in Section 302 of ERISA; or (3) terminate in a manner which could result in liability of Borrowers or any Subsidiary thereof to the Plan or to the PBGC or the imposition of a Lien on the Property of Borrowers or any Subsidiary thereof pursuant to Section 4068 of ERISA. (c) At any time, assume any obligation to contribute to any Multiemployer Plan, nor shall Borrowers or any Subsidiary thereof acquire any Person or assets of any Person which has, or has had at any time from and after January 2, 1974, an obligation to contribute to any Multiemployer Plan. (d) Fail immediately to notify Agent and Banks of the occurrence of any "reportable event" (as defined in Section 4043 of ERISA) or of any "prohibited transaction" (as defined in Section 4975 of the Internal Revenue Code of 1954, as amended) with respect to any Plan or any trust created thereunder. Upon request by Agent or any Bank, Borrowers promptly shall 43 46 furnish to Agent and Banks copies of any reports or other documents filed by Borrowers or any Subsidiary thereof with the United States Secretary of Labor, the PBGC and/or the Internal Revenue Service, with respect to any Plan. (e) At any time, permit any Plan to fail to comply with ERISA or other applicable Law in any material respect. 6.7 Change in Nature of Business/Management. Make any material change in the nature of the business of Borrowers and their Subsidiaries, as conducted and presently proposed to be conducted, or remove or allow removal of D. Michael Talla, John Gibbons or Timothy O'Brien from any management position presently held by him, unless evidence of satisfactory progress to procure a replacement acceptable to the Requisite Banks is delivered to Agent and Banks within 30 days thereafter. 6.8 Real Property Leases. Enter into one or more real property lease agreements (exclusive of any real property lease agreements in connection with a New Club Development or an Acquisition previously approved by the Requisite Banks) requiring lease payments by Borrowers or any of them in excess of $1,500,000 per annum or enter into one or more real property lease agreements on or after the date of this Agreement which, when taken together with real property lease agreements entered into prior to the date of this Agreement, will cause the aggregate amount of lease payments to be made by Borrowers to exceed $14,000,000 in calendar 1999 or $20,200,000 in calendar 2000. 6.9 Indebtedness, Guaranties and Liens. Create, incur, assume or suffer to exist any Lien of any nature upon or with respect to any of their respective Properties, whether now owned or hereafter acquired; create, incur or assume any indebtedness for borrowed money or in connection with the purchase of Property or any liability to the issuer of any letter of credit; guaranty or otherwise become responsible (including, but not limited to, any agreement to purchase any obligations, stock, Property, goods or services or to supply or advance any funds, Property, goods or services) for the indebtedness or obligations of any other Person; or incur any lease obligation that is required to be capitalized under generally accepted accounting principles, except: (a) Indebtedness and Liens securing obligations incurred in the ordinary course of business and incurred in connection with purchase money transactions including real estate or equipment or fixture purchases, provided that the amount of such transactions involving purchases of new equipment for existing Clubs (i.e., other than in connection with Acquisitions or New Club Developments, as permitted by Section 6.12) shall not exceed an aggregate amount of $1,500,000 principal (or the equivalent thereof) in any one fiscal year; (b) Intentionally omitted; 44 47 (c) Intentionally omitted; (d) Liens securing the claims or demands of materialmen, mechanics, and other like Persons not yet delinquent or being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (e) Indebtedness, liabilities, guaranties or Liens in favor of Agent and Banks under this Agreement, the Notes and the other Loan Documents; (f) Indebtedness and Liens listed on Schedule 6.9 or Indebtedness and Liens arising out of the extension or refinancing of the obligations of Borrowers described on Schedule 6.9, provided that such obligations are not increased and are not secured by any additional property; (g) Guaranties arising from endorsement, in the ordinary course of collection, of negotiable instruments; (h) Indebtedness and Liens for taxes and assessments or other government charges or levies if not yet due and payable or, if due and payable, which are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; (i) Liens under workers' compensation, unemployment insurance, social security, or similar legislation, if they are being contested in good faith by appropriate proceedings and for which appropriate reserves are maintained; and (j) Trade credit for goods and services provided to the Borrowers and the Subsidiaries in the ordinary course of business. 6.10 Transactions with Affiliates. Enter into any transaction of any kind with any Affiliate of Borrowers other than (a) transactions between or among Borrowers and their Subsidiaries so long as, as a result of such transactions, the aggregate amount advanced to, invested in or committed to any Non-Borrower Affiliate on or after January 1, 1997, does not exceed $200,000, (b) arms-length transactions with Affiliates which are permitted with non-Affiliates pursuant to Sections 6.1, 6.3, 6.5, and (c) those transactions listed in Schedules 6.10 and 6.17. 6.11 Change in Fiscal Year. Change its fiscal year, or the fiscal months thereof. 6.12 Capital Expenditures and Purchase Money Transactions. Make or incur obligations for Capital Expenditures in the aggregate for Borrowers and their Subsidiaries in any fiscal year in excess of five percent (5.0%) of Borrowers' net revenues derived from operation of the Clubs for such fiscal year before restatements for acquisitions accounted for using the pooling method of accounting. For the purpose of determining compliance by Borrowers and their Subsidiaries with 45 48 the foregoing covenant, the following Capital Expenditures and indebtedness and Liens securing obligations incurred in connection with purchase money equipment financings ("Purchase Money Indebtedness and Liens") shall be excluded: (i) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than one year following the consummation of, an Acquisition for which the consent of Banks is not required pursuant to Section 6.3(b), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such Acquisition do not exceed the respective limits on total consideration for such Acquisition set forth in Section 6.3(b); (ii) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than one year following the consummation of, an Acquisition for which the consent of Banks is required pursuant to Section 6.3(b), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such Acquisition do not exceed the total consideration limit imposed for such Acquisition by Banks in issuing their approval of such Acquisition; (iii) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than 90 days following the opening of the related new Club, a New Club Development for which the consent of Banks is not required pursuant to Section 6.3(c), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such New Club Development do not exceed the respective limits on total consideration for such New Club Development set forth in Section 6.3(c); and (iv) Capital Expenditures made and Purchase Money Indebtedness and Liens incurred in connection with, and no later than 90 days following the opening of the related new Club, a New Club Development for which the consent of Banks is required pursuant to Section 6.3(c), so long as the aggregate amount of such Capital Expenditures and Purchase Money Indebtedness and Liens and of all other expenditures relating to such New Club Development do not exceed the total consideration limit imposed by Banks in issuing their approval of such New Club Development. 6.13 Tangible Net Worth. Permit Tangible Net Worth, as of the last day of any fiscal quarter of Borrowers and their Subsidiaries ending during any period specified below, to be less than $77,000,000 plus 80% of Borrowers' cumulative net income after December 31, 1997 not reduced by net losses and increased by one hundred percent (100%) of funds generated from any equity offering occurring after May 31, 1998. 46 49 6.14 Ratio of Total Unsubordinated Liabilities to Tangible Net Worth. Permit the ratio of Total Unsubordinated Liabilities to Tangible Net Worth, as of the last day of any fiscal quarter of Borrowers and their Subsidiaries to be greater than 1.25:1.00. 6.15 Debt Service Coverage Ratio. For Borrowers and their Subsidiaries, permit the ratio of (i) EBITDA to (ii) interest expense on all indebtedness plus the current portion of long term debt of Borrowers to be less than 2.00:1.00, with such ratio to be calculated at the end of each fiscal quarter (x) on a cumulative annualized basis for each fiscal quarter beginning with the second quarter of Borrowers' and their Subsidiaries' 1998 fiscal year and continuing through and including the fourth quarter of Borrowers' and their Subsidiaries' 1998 fiscal year, and (y) on a rolling four-quarter basis for each fiscal quarter ending after the fourth quarter of Borrowers' and their Subsidiaries 1998 fiscal year. For the purpose of calculation only, the $4,000,000 balloon payment due November 1999 under the Sports Club/Irvine note shall be excluded. 6.16 Intentionally Omitted. 6.17 Loans to Officers. Make any loans, advances or other extensions of credit to any of Borrowers' executives, officers, directors, shareholders or employees (or any relatives of any of the foregoing) in an aggregate amount exceeding $200,000, other than those set forth on Schedule 6.17. 6.18 Deposit Accounts. Establish any deposit accounts in the name of any Borrower or any Subsidiary without prior notice to Agent. 6.19 Ratio of Funded Debt to EBITDA. Permit the ratio of (i) Funded Debt to (ii) EBITDA, as of the last day of the fiscal quarter of Borrowers and their Subsidiaries, calculated at the end of each such quarter on a rolling four (4) quarter basis, to be greater than 3.75:1.00. ARTICLE 7 INFORMATION AND REPORTING REQUIREMENTS 7.1 Financial and Business Information. So long as any Loan remains unpaid, or any other Obligation remains unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrowers shall, in addition to complying with the requirements of Section 8.3 of this Agreement, and unless the Requisite Banks otherwise consent in writing, deliver to Agent, at Borrowers' sole expense: (a) As soon as practicable, and in any event within 30 days after the end of each fiscal month of Borrowers, (i) consolidated balance sheets of Borrowers and their Subsidiaries as at the end of such month, setting forth in comparative form the corresponding figures as at the end of the corresponding month of their preceding fiscal year, (ii) Club operating statements of each Club 47 50 as at the end of such month, (iii) consolidated income statements of Borrowers and their Subsidiaries for such month and for the portion of their fiscal year ended with such month, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year and (iv) consolidated cash flow statements of Borrowers and their Subsidiaries for the portion of their fiscal year ended with such month, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year, all in reasonable detail. The preceding financial statements shall be certified by a Responsible Official of a Borrower as fairly presenting the financial condition, results of operations and cash flow of Borrowers and their Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at such date and for such periods, subject only to normal year-end audit adjustments. (b) As soon as practicable, and in any event within 45 days after the end of each quarter of Borrowers (including the last quarter of each fiscal year, provided that with respect to such last quarter the financial statements required hereby may be in preliminary form, prior to year-end audit adjustments), (i) consolidated balance sheets of Borrowers and their Subsidiaries as at the end of such quarter, setting forth in comparative form the corresponding figures as at the end of the corresponding quarter of their preceding fiscal year, (ii) consolidated income statements of Borrowers and their Subsidiaries for such quarter and for the portion of their fiscal year ended with such quarter, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year and (iii) consolidated cash flow statements of Borrowers and their Subsidiaries for the portion of their fiscal year ended with such quarter, setting forth in comparative form the corresponding figures for the corresponding periods of their preceding fiscal year, all in reasonable detail. The preceding financial statements shall be certified by a Responsible Official of a Borrower as fairly presenting the financial condition, results of operations and cash flow of Borrowers and their Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at such date and for such periods, subject only to normal year-end audit adjustments. (c) As soon as practicable, and in any event within 90 days after the close of each fiscal year of Borrowers, (i) consolidated balance sheets of Borrowers and their Subsidiaries as at the end of such fiscal year, setting forth in comparative form the corresponding figures as at the end of their preceding fiscal year, and (ii) consolidated income statements and cash flow statements of Borrowers and their Subsidiaries for such fiscal year, setting forth in comparative form the corresponding figures for their previous fiscal year, all in reasonable detail. Such balance sheets and statements shall be prepared in accordance with generally accepted accounting principles, consistently applied, and such consolidated balance sheet and consolidated statements shall be accompanied by a report and unqualified opinion of independent public accountants of recognized standing selected by Borrowers and reasonably satisfactory to the Requisite Banks, which report and opinion shall be prepared in accordance with generally accepted auditing principles as at such 48 51 date, and shall be subject only to such qualifications and exceptions as are acceptable to the Requisite Banks in the exercise of their reasonable discretion. (d) As soon as practicable, and in any event within 30 days after the end of each month of Borrowers, a Certificate of a Responsible Official of a Borrower setting forth a schedule of Capital Expenditures made by Borrowers and/or their Subsidiaries during such month, and during their fiscal year to date, separately for each Club. (e) As soon as practicable, and in any event within 30 days after the start of each fiscal year of Borrowers, a monthly budget for the then started fiscal year including, without limiting the generality of the foregoing, monthly projected consolidated balance sheets, income statements and cash flow statements of Borrowers and their Subsidiaries and individual Club operating statements, all in reasonable detail. (f) Within 30 days following the end of each month, a membership information report for each Club and in the aggregate in the form now prepared by Borrowers on a monthly basis, reflecting no less than the immediately preceding consecutive six months, and reflecting the number of members, the number of new memberships sold and the gross reduction in number of memberships, and supplemented by such additional information as Agent may request. (g) Within 30 days after the close of each fiscal year of Borrowers, Borrowers' budget of capital expenditures for capital improvements, replacements and other related purposes for the following fiscal year. (h) Within the earlier of 5 days after (i) the same are filed with the Securities and Exchange Commission ("SEC") or (ii) the same are required to be filed with the SEC, subject to allowable SEC extensions, copies of each annual report, proxy or financial statement or other report or communication sent to the shareholders of Borrowers, and copies of all annual, regular, periodic and special reports and registration statements which Borrowers may file or be required to file with the Securities and Exchange Commission or any similar or corresponding Governmental Agency or with any securities exchange. (i) Within 5 days after receipt of copies of all correspondence and notices received by Borrowers from the Internal Revenue Service ("IRS") relating to any adverse action or determination by the IRS in respect of any Borrower's tax status under the Internal Revenue Code. (j) Immediately upon becoming aware of the existence of any condition or event which constitutes a Default, a written notice specifying the nature and period of existence thereof and what action Borrowers or their Subsidiaries are taking or propose to take with respect thereto. 49 52 (k) Promptly upon request by Agent or the Requisite Banks, copies of any detailed audit reports submitted to Borrowers or any of their Subsidiaries by independent accountants in connection with the accounts or books of Borrowers or any of their Subsidiaries, or any audit of any of them. (l) Promptly after request by Agent or the Requisite Banks, copies of any report or other document filed by Borrowers or any of their Subsidiaries with any Governmental Agency. (m) Promptly upon becoming aware that any Person asserts a claim against Borrowers or any of their Subsidiaries in excess of $500,000 and that such Person has given notice or taken any other action with respect to a claimed default or event of default, a written notice specifying the notice given or action taken by such Person and the nature of the claimed default or event of default and what action Borrowers or their Subsidiaries are taking or propose to take with respect thereto. (n) As soon as practicable, and in any event within 45 days after the end of each fiscal quarter of Borrowers, a project development status report in form and substance acceptable to Agent and Banks, which shall include, at a minimum, a timetable for architectural and construction design, permitting, construction milestones, as may be available, as well as an estimated date for completion. Such report also shall include the budget as originally approved by the Board of Directors of the applicable Borrower or Subsidiary and by Banks, as well as any material modifications that have been approved by Banks or which may require such approval. (o) Such other data and information as from time to time may be reasonably requested by Agent or the Requisite Banks. 7.2 Compliance Certificates. So long as any Loan remains unpaid, or any other Obligation remains unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrowers shall, unless the Requisite Banks otherwise consent in writing, deliver to Agent, at Borrowers' sole expense, not later than 45 days after the end of each fiscal quarter of Borrower, a Certificate of a Responsible Official of a Borrower (a) setting forth computations showing, in detail satisfactory to the Requisite Banks, whether Borrowers and their Subsidiaries were in compliance with their obligations pursuant to Sections 6.11 through 6.16, inclusive; (b) setting forth computations showing, in detail satisfactory to the Requisite Banks, the Applicable Pricing Level; (c) stating that a review of the activities of Borrowers and their Subsidiaries during such fiscal period has been made under supervision of the certifying Responsible Official with a view to determining whether during such fiscal period Borrowers and their Subsidiaries performed and observed all their respective Obligations under the Loan Documents, and either (i) stating that, to the best knowledge of the certifying Responsible Official, during such fiscal period, Borrowers and their Subsidiaries performed and observed each covenant and condition of the Loan Documents applicable to them, or (ii) if Borrowers and their Subsidiaries have not performed and observed such covenants and 50 53 conditions, specifying all such Defaults and their nature and status; (d) stating that the Properties of Borrowers and their Subsidiaries are being maintained and are in reasonable working order and condition, ordinary replacement wear and tear excepted; and (e) stating that (i) the real property assets of Borrowers are free and clear of all Liens other than the respective Liens of the MKDG/Rhodes SC Partnership on the land, improvements and building of the Sports Club/Irvine and of Hawthorne Savings on the land, improvements and building of the Sports Club/Agoura Hills (the "Existing Real Property Liens"), (ii) there has been no increase in the amount of any indebtedness or liability secured by each Existing Real Property Lien during such fiscal quarter, (iii) no real property assets of Borrowers have been sold, assigned, exchanged, transferred, leased or otherwise conveyed or disposed of to any Person, and (iv) no Borrower has entered into any agreement to do any of the foregoing. 7.3 Revisions or Updates to Schedules. Should any of the information or disclosures provided on any of the Schedules originally attached hereto become outdated or incorrect in any material respect, upon request by Agent, Borrowers promptly shall provide to Agent such revisions or updates to such Schedule(s) as may be necessary or appropriate to update or correct such Schedule(s); provided that no such revisions or updates to any Schedule(s) shall be deemed to have amended, modified or superseded such Schedule(s) as originally attached hereto, or to have cured any breach of warranty or representation resulting from the inaccuracy or incompleteness of any such Schedule(s), unless and until the Requisite Banks, in their sole and absolute discretion, shall have accepted in writing such revisions or updates to such Schedule(s). 7.4 New Club Development Project Reports. So long as any Loan remains unpaid, or any other Obligation remains unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrowers shall, unless the Requisite Banks otherwise consent in writing, deliver to Agent, at Borrower's sole expense, not later than 10 days after the end of each calendar month, a Certificate of a Responsible Official of a Borrower, in form and substance satisfactory to Agent, setting forth the name of each New Development Project and the aggregate amount of funds expended in connection with each such New Development Project to and including the last day of such calendar month. ARTICLE 8 CONDITIONS 8.1 Initial Loans, Etc. The obligation of each Bank to make the initial Loans and to issue the initial Standby Letter of Credit, each are subject to the following conditions precedent (in addition to any applicable conditions precedent set forth elsewhere in this Article 8), each of which shall be satisfied prior to or concurrently with the making of the initial Loans and the issuance of the initial Standby Letter of Credit (unless Banks, in their sole and absolute discretion, shall agree otherwise): 51 54 (a) Agent shall have received all of the following, each of which shall be originals unless otherwise specified, each properly executed by a Responsible Official of each party thereto, each dated as of the Closing Date and each in form and substance satisfactory to Agent and its legal counsel (unless otherwise specified or, in the case of the date of any of the following, unless Agent otherwise agrees or directs): (1) six executed counterparts of this Agreement; (2) the Notes executed by Borrowers payable to the order of Banks; (3) with respect to each Borrower and any and each Subsidiary thereof, such documentation as Agent may require to establish the due organization, valid existence and good standing of such Borrower and each such Subsidiary, its qualification to engage in business in each jurisdiction in which it is engaged in business or required to be so qualified, its authority to execute, deliver and perform any Loan Documents to which it is a Party, and the identity, authority and capacity of each Responsible Official thereof authorized to act on its behalf, including, without limitation, certified copies of articles of incorporation and amendments thereto, bylaws and amendments thereto, partnership agreements, certificates of limited partnerships, certificates of good standing and/or qualification to engage in business, certificates of corporate resolutions, incumbency certificates, Certificates of Responsible Officials, and the like; (4) such Loan Documents as Agent or Requisite Banks may require pledging Property of Borrowers and/or any of their Subsidiaries, together with such related financing statements or other documents as Agent or Requisite Banks may request to perfect, effect, facilitate, consent to, give notice of or otherwise evidence any Liens created thereby; (5) the Global Collateral Documents Amendment; (6) the Opinion of Counsel; (7) a Certificate of a Responsible Official of Borrowers certifying that the conditions specified in Sections 8.1(c) and 8.1(d) have been satisfied; (8) evidence that all Liens or Rights of Others on or in the Property of Borrowers and/or their Subsidiaries (other than such Liens and Rights of Others as are permitted by Section 6.8) have been terminated or discharged; and 52 55 (9) such other certificates, documents, consents or opinions as Agent or Requisite Banks reasonably may require. (b) Duly executed financing statements with respect to the Collateral shall have been filed and/or recorded with such Governmental Agencies, and in such jurisdictions and locales, as Agent or Requisite Banks may specify. (c) The representations and warranties of Borrowers contained in Article 4 shall be true and correct as of the date made or reaffirmed. (d) Borrowers and their Subsidiaries and any other Parties shall be in compliance with all the terms and provisions of the Loan Documents, and no Default shall have occurred and be continuing. (e) The fees referred to in Sections 3.2 and 3.5 have been paid to Banks and/or Agent, as applicable. 8.2 Any Loan. In addition to any applicable conditions precedent set forth elsewhere in this Article 8, the obligation of Banks to make any Loan, to redesignate any Loan, and issue any Standby Letter of Credit are subject to the following conditions precedent: (a) except (i) for representations and warranties which speak as of a particular date or are no longer true and correct as a result of a change which is permitted by this Agreement or (ii) as disclosed by Borrowers and approved in writing by the Requisite Banks, the representations and warranties contained in Article 4 shall be true and correct on and as of the date of the Loan or redesignation or issuance or creation, as the case may be, as though made on and as of that date; (b) except for (i) the matters set forth in Schedule 4.10, (ii) any matter fully covered as to subject matter and amount (subject to applicable deductibles and retentions) by insurance for which the insurance carrier has not asserted lack of subject matter coverage or reserved its right to do so, or (iii) any matter, or series of related matters, involving a claim against Borrowers of less than $100,000, there shall be no actions, suits or proceedings pending against or affecting Borrowers or any of their Subsidiaries or any Property of any of them in any court of Law or before any Governmental Agency which might reasonably be expected to have a material adverse effect on the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole; (c) no material adverse change shall have occurred in the business, operations or condition (financial or otherwise) of Borrowers and their Subsidiaries, taken as a whole, since the Closing Date; 53 56 (d) no Default shall have occurred and be continuing; (e) Agent shall have timely received a properly completed Request for Loan, Request for Redesignation of Loans or Request for Standby Letter of Credit, as the case may be, in compliance with all applicable provisions of Article 2; and Agent shall have received, dated as of the date of the Loan or redesignation or issuance or creation, as the case may be, a Certificate of a Responsible Official of a Borrower to the effect that all of the above conditions have been satisfied, with any changes or exceptions thereto being described in a schedule attached to such certificate and with such changes or exceptions being subject to the approval of the Requisite Banks; and (f) Agent shall have received, in form and substance satisfactory to the Requisite Banks such other certificates, documents or consents as the Requisite Banks reasonably may require. ARTICLE 9 EVENTS OF DEFAULT AND REMEDIES UPON EVENT OF DEFAULT 9.1 Events of Default. The existence or occurrence of any one or more of the following events, whatever the reason therefor, shall constitute an Event of Default: (a) Borrowers fail to pay any installment of principal or interest on any indebtedness on any of the Notes or any portion thereof, or to reimburse Agent or any Bank for any payment made under any Standby Letter of Credit, or to pay any fee or any other amount due Agent or any Bank under any Loan Document, within five (5) Banking Days following the giving of notice by Agent or Requisite Banks of such Default; or (b) Any failure to comply with Section 7.1(j); or (c) Borrowers, any of their Subsidiaries or any other Party fails to perform or observe any other term, covenant or agreement contained in any Loan Document, including, but not limited to, those set forth in Articles 6 and 7 of this Agreement, on its part to be performed or observed within fifteen (15) days after the giving of written notice by Agent or Borrowers otherwise becoming aware of such Default; or (d) Any representation or warranty made in any Loan Document or in any certificate, agreement, instrument or other document made or delivered by any Party pursuant to or in connection with any Loan Document proves to have been incorrect when made in any respect that is materially adverse to the interests of Agent or Banks; or 54 57 (e) Borrowers or any of their Subsidiaries (i) fail to pay the principal, or any principal installment, of any present or future indebtedness for borrowed money of $200,000 or more or in connection with the purchase or lease of Property, or any guaranty of present or future indebtedness for borrowed money of $200,000 or more or issued in connection with the purchase or lease of Property, on its part to be paid, when due (or within any stated grace period), whether at the stated maturity, upon acceleration, by reason of required prepayment or otherwise or (ii) fails to perform or observe any other term, covenant or agreement on its part to be performed or observed in connection with any present or future indebtedness for borrowed money of $200,000 or more or in connection with the purchase or lease of Property, or of any guaranty of present or future indebtedness of $200,000 or more for borrowed money or issued in connection with the purchase or lease of Property, if as a result of such failure any holder or holders thereof (or an agent or trustee on its or their behalf) has the right to declare such indebtedness due before the date on which it otherwise would become due, or has commenced judicial or nonjudicial action to collect such indebtedness or to foreclose or otherwise realize upon security held therefor, or has taken or is taking such other actions as might materially adversely affect the Collateral, the interests of any Bank under the Loan Documents or the ability of Borrowers or their Subsidiaries to pay and perform their Obligations under the Loan Documents; or (f) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of the Requisite Banks or satisfaction in full of all the Obligations, ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect which, in the reasonable opinion of the Requisite Banks, is materially adverse to the interests of the Banks; or any Party thereto denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind same; or (g) A final judgment against any Borrower or any of its Subsidiaries is entered for the payment of money in excess of $500,000 and such judgment remains unsatisfied without procurement of a stay of execution for more than thirty (30) calendar days after the date of entry of judgment; or (h) Any Borrower or any of Subsidiary thereof, is the subject of an order for relief in a bankruptcy case, or is unable or admits in writing its inability to pay its debts as they mature, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any part of its Property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for thirty (30) calendar days; or institutes or consents to any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, custodianship, 55 58 conservatorship, liquidation, rehabilitation or similar case or proceedings relating to it or to all or any part of its Property under the Laws of any jurisdiction; or any similar case or proceeding is instituted without the consent of that Person and continues undismissed or unstayed for thirty (30) calendar days; or any judgment, writ, warrant of attachment or execution or similar process is issued or levied against all or any material part of the Property of any such Person and is not released, vacated or fully bonded within thirty (30) calendar days after its issue or levy; or (i) Except as otherwise expressly permitted by any Loan Document or agreed to by the Requisite Banks, any Lien on any Collateral created by any Loan Document, at any time after the execution and delivery of that Loan Document and for any reason other than satisfaction in full of all Obligations, ceases or fails to constitute a valid, perfected and subsisting first priority Lien on the Collateral purported to be covered thereby (unless such cessation or failure is the fault of Agent or the Banks to timely file continuation statements); or (j) Any Borrower or any Subsidiary thereof is dissolved or liquidated or all or substantially all of the assets of any Borrower or any Subsidiary thereof are sold or otherwise transferred in violation of the provisions of this Agreement without the written consent of the Requisite Banks. 9.2 Remedies Upon Event of Default. Without limiting any other rights or remedies of Agent or Banks provided for elsewhere in this Agreement, or the Loan Documents, or by applicable Law, or in equity or otherwise: (a) Upon the occurrence of any Event of Default other than an Event of Default described in Section 9.1(f): (1) the Commitment to make Loans and all other obligations of the Agent or the Banks and all rights of Borrowers and any other Parties under the Loan Documents shall terminate without notice to or demand upon Borrowers, which are expressly waived by Borrowers, except that the Requisite Banks may waive the Event of Default or, without waiving, determine, upon terms and conditions satisfactory to Banks, to make further Loans, which waiver or determination shall apply equally to, and shall be binding upon, all of the Banks; and (2) the Requisite Banks may request the Agent to, and the Agent thereupon shall declare all or any part of the unpaid principal of all Notes, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be forthwith due and payable, whereupon the same shall become and be forthwith due and payable, without protest, presentment, notice of dishonor, 56 59 demand or further notice of any kind, all of which are expressly waived by Borrowers. (b) Upon the occurrence of any Event of Default described in Section 9.1(f): (1) the Commitment to make Loans and all other obligations of Agent or any Bank and all rights of Borrowers and any other Parties under the Loan Documents shall terminate without notice to or demand upon Borrowers, which are expressly waived by Borrowers, except that all of the Banks may waive the Event of Default or, without waiving, determine, in their sole discretion, to make further Loans; and (2) the unpaid principal of all Notes, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents shall be forthwith due and payable, without protest, presentment, notice of dishonor, demand or further notice of any kind, all of which are expressly waived by Borrowers. (c) Upon the occurrence of any Event of Default, Agent and Banks or any of them, without notice to or demand upon Borrowers, which are expressly waived by Borrowers, except as required by California Commercial Code Section 9504 or any modification or replacement statute thereof, or by the terms of this Agreement, may proceed (but only with the consent of the Requisite Banks) to protect, exercise and enforce its rights and remedies under the Loan Documents against Borrowers and such other rights and remedies as are provided by Law or equity. (d) The order and manner in which the Banks' rights and remedies are to be exercised shall be determined by the Requisite Banks in their sole discretion, and all payments received by Agent and the Banks shall be applied first to the costs and expenses (including outside attorneys' fees and disbursements) of Agent, acting as Agent and of Banks pro rata and thereafter to the Obligations owed to Banks, pro rata, under the Agreement. For the purpose of computing Borrowers' Obligations under the Loan Documents, payments shall be applied, first, to the costs and expenses of Agent and Banks, as set forth above, second, to the payment of accrued and unpaid interest due under any Loan Documents to and including the date of such application, third, to the payment of all unpaid principal amounts due under any Loan Documents (including, for the purposes hereof, principal due under the Notes and reimbursement due for payments made under Letters of Credit), and fourth, to the payment of all other amounts (including fees) then owing to Agent and Banks under the Loan Documents. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Banks hereunder or thereunder or at Law or in equity. 57 60 (e) Upon the occurrence of any event that would be an Event of Default under Section 9.1(g) with the passage of time, Agent and Banks may take such action as the Requisite Banks deem necessary to protect the interests of Banks under the Loan Documents. ARTICLE 10 THE AGENT 10.1 Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to Agent by the terms thereof or are reasonably incidental, as determined by Agent, thereto. This appointment and authorization is intended solely for the purpose of facilitating the servicing of the Loans and does not constitute appointment of Agent as trustee for any Bank or as representative of any Bank for any other purpose and, except as specifically set forth in the Loan Documents to the contrary, Agent shall take such action and exercise such powers only in an administrative and ministerial capacity. 10.2 Agent and Affiliates. Comerica Bank - California (and each successor Agent) has the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it was not the Agent, and the term "Bank" or "Banks" includes Comerica Bank - California in its individual capacity. Comerica Bank - California (and each successor Agent) and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust or other business with Borrowers, any Subsidiary thereof, or any Affiliate of Borrowers or any Subsidiary thereof, as if it was not the Agent and without any duty to account therefor to Banks. Comerica Bank - -California (and each successor Agent) need not account to any other Bank for any monies received by it for reimbursement of its costs and expenses as Agent hereunder, or for any monies received by it in its capacity as a Bank hereunder. 10.3 Proportionate Interest of the Banks in any Collateral. Agent, on behalf of all the Banks, shall hold in accordance with the Loan Documents all items of Collateral or interests therein received or held by Agent. Subject to Agent's and the Banks' rights to reimbursement for their costs and expenses hereunder (including attorneys' fees and disbursements and other professional services) and subject to the application of payments in accordance with Section 9.2(d), each Bank shall have an interest in any Collateral or interests therein in the same proportions that the aggregate Obligations owed such Bank under the Loan Documents bear to the aggregate Obligations owed under the Loan Documents to all the Banks, without priority or preference among the Banks. 10.4 Banks' Credit Decisions. Each Bank agrees that it has, independently and without reliance upon Agent, any other Bank or the directors, officers, agents, employees or attorneys of 58 61 Agent or of any other Bank, and instead in reliance upon information supplied to it by or on behalf of Borrowers and upon such other information as it has deemed appropriate, made its own independent credit analysis and decision to enter into this Agreement. Each Bank also agrees that it shall, independently and without reliance upon Agent, any other Bank or the directors, officers, agents, employees or attorneys of Agent or of any other Bank, continue to make its own independent credit analyses and decisions in acting or not acting under the Loan Documents. 10.5 Action by Agent. (a) Agent may assume that no Default has occurred and is continuing, unless Agent has actual knowledge of the Default, has received notice from Borrowers stating the nature of the Default, or has received notice from a Bank stating the nature of the Default and that such Bank considers the Default to have occurred and to be continuing. (b) Agent has only those obligations under the Loan Documents as are expressly set forth therein. (c) Except for any obligation expressly set forth in the Loan Documents and as long as Agent may assume that no Event of Default has occurred and is continuing, Agent may, but shall not be required to exercise its discretion to act or not act, except that Agent shall be required to act or not act upon the instructions of the Requisite Banks (or of all the Banks, to the extent required by Section 11.3) and those instructions shall be binding upon Agent and all Banks, provided that Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law. (d) If Agent may not assume that no Event of Default has occurred and is continuing, Agent shall give notice thereof to Banks and shall act or not act upon the instructions of the Requisite Banks (or of all the Banks, to the extent required by Section 11.3), provided that Agent shall not be required to act or not act if to do so would be contrary to any Loan Document or to applicable Law, and except that if the Requisite Banks (or all Banks, if required under Section 11.3) fail, for five (5) Banking Days after the receipt of notice from Agent, to instruct Agent, then Agent, in its discretion, may act or not act as it deems advisable for the protection of the interests of Banks. (e) Agent shall have no liability to any Bank for acting, or not acting, as instructed by the Requisite Banks (or all the Banks, if required under Section 11.3), notwithstanding any other provision hereof. 10.6 Liability of Agent. Neither Agent nor any of its directors, officers, agents, employees or attorneys shall be liable for any action taken or not taken by them under or in connection with the 59 62 Loan Documents, except for their own gross negligence or willful misconduct. Without limitation on the foregoing, Agent and its directors, officers, agents, employees and attorneys: (a) May treat the payee of any Note as the holder thereof until Agent receives notice of the assignment or transfer thereof, in form satisfactory to Agent, signed by the payee, and may treat each Bank as the owner of that Bank's interest in the Obligations for all purposes of this Agreement until Agent receives notice of the assignment or transfer thereof, in form satisfactory to Agent, signed by that Bank. (b) May consult with legal counsel (including in-house legal counsel), accountants (including in-house accountants) and other professionals or experts selected by it, or with legal counsel, accountants or other professionals or experts for Borrowers and/or their Subsidiaries or Banks, and shall not be liable for any action taken or not taken by it in good faith in accordance with the advice of such legal counsel, accountants or other professionals or experts. (c) Shall not be responsible to any Bank for any statement, warranty or representation made in any of the Loan Documents or in any notice, certificate, report, request or other statement (written or oral) given or made in connection with any of the Loan Documents. (d) Except to the extent expressly set forth in the Loan Documents, shall have no duty to ask or inquire as to the performance or observance by Borrowers or their Subsidiaries of any of the terms, conditions or covenants of any of the Loan Documents or to inspect any Collateral or the Property, books or records of Borrowers or their Subsidiaries. (e) Will not be responsible to any Bank for the due execution, legality, validity, enforceability, genuineness, effectiveness, sufficiency or value of any Loan Document, any other instrument or writing furnished pursuant thereto or in connection therewith, or any Collateral. (f) Will not incur any liability by acting or not acting in reliance upon any Loan Document, notice, consent, certificate, statement, request or other instrument or writing believed by it to be genuine and signed or sent by the proper party or parties. (g) Will not incur any liability for any arithmetical error in computing any amount paid or payable by the Borrowers or any Subsidiary or Affiliate thereof or paid or payable to or received or receivable from any Bank under any Loan Document, including, without limitation, principal, interest, commitment fees, advances and other amounts; provided that, promptly upon discovery of such an error in computation, the Agent, the 60 63 Banks and (to the extent applicable) Borrowers and/or their Subsidiaries or Affiliates shall make such adjustments as are necessary to correct such error and to restore the parties to the position that they would have occupied had the error not occurred. 10.7 Indemnification. Each Bank shall, ratably in accordance with its percentage of the total Commitment, indemnify and hold Agent and its directors, officers, agents, employees and attorneys harmless against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, attorneys' fees and disbursements) that may be imposed on, incurred by or asserted against it or them in any way relating to or arising out of the Loan Documents (other than losses incurred by reason of the failure of Borrowers to pay the indebtedness represented by the Notes and the Standby Letters of Credit) or any action taken or not taken by it as Agent thereunder, except such as result from its own gross negligence or willful misconduct. Without limitation on the foregoing, each Bank shall reimburse Agent upon demand for that Bank's ratable share of any cost or expense incurred by Agent in connection with the negotiation, preparation, execution, delivery amendment, waiver, restructuring, reorganization (including a bankruptcy reorganization), enforcement or attempted enforcement of the Loan Documents, to the extent that Borrowers or any other Party are required by Section 11.4 to pay that cost or expense but fails to do so upon demand. 10.8 Successor Agent. Agent may resign as such at any time by written notice to Borrowers and the Banks, to be effective upon a successor's acceptance of appointment as Agent. The Requisite Banks at any time may remove Agent by written notice to that effect to be effective on such date as the Requisite Banks designate. In either event: (a) The Requisite Banks shall appoint a successor Agent, who must be from among Banks, provided that any resigning Agent shall be entitled to appoint a successor Agent from among Banks, subject to acceptance of appointment by that successor Agent, if the Requisite Banks have not appointed a successor Agent within thirty (30) days after the date the resigning Agent gave notice of resignation; (b) Upon a successor's acceptance of appointment as Agent, the successor will thereupon succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent or the removed Agent; and (c) Upon the effectiveness of any resignation or removal, the resigning Agent or the removed Agent thereupon will be discharged from its duties and obligations thereafter arising under the Loan Documents other than obligations arising as a result of any action or inaction of the resigning Agent or the removed Agent prior to the effectiveness of such resignation or removal. ARTICLE 11 MISCELLANEOUS 11.1 Intentionally Omitted. 61 64 11.2 Cumulative Remedies; No Waiver. The rights, powers, privileges and remedies of Agent and Banks provided herein or in any Note or other Loan Document are cumulative and not exclusive of any right, power, privilege or remedy provided by Law or equity. No failure or delay on the part of Agent or any Bank in exercising any right, power, privilege or remedy may be, or may be deemed to be, a waiver thereof; nor may any single or partial exercise of any right, power, privilege or remedy preclude any other or further exercise of the same or any other right, power, privilege or remedy. The terms and conditions of Article 8 hereof are inserted for the sole benefit of Agent and Banks and Agent (acting with the consent of the Requisite Banks) or the Requisite Banks may waive them in whole or in part, with or without terms or conditions, in respect of any Loan or Standby Letter of Credit, without prejudicing Agent's or any Bank's rights to assert them in whole or in part in respect of any other Loan or Standby Letter of Credit. 11.3 Amendments; Consents. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, and no consent to any departure by the Borrowers or any other Party therefrom, may in any event be effective unless in writing signed by Agent with approval of the Requisite Banks (and, in the case of amendments, modifications or supplements of or to any Loan Document to which any Borrower is a Party, the approval in writing of such Borrower), and then only in the specific instance and for the specific purpose given; and, without the approval in writing of all Banks, no amendment, modification, supplement, termination, waiver or consent may be effective: (a) To amend or modify the principal of, or the amount of principal, principal prepayments or the rate of interest payable on, any Note, or the amount of the Commitment or of any commitment fee payable to any Bank, or any other fee or amount payable to any Bank under the Loan Documents or to allow any material release of Collateral; (b) To postpone any date fixed for any payment of principal of, prepayment of principal of or any installment of interest on, any Note, or the facility fee, or any installment of any commitment fee, or any reimbursement obligation due under any Standby Letter of Credit, or to extend the term of the Commitment; (c) To amend or modify the provisions of (1) the definitions of "Commitment", "Maximum Standby Letter of Credit Amount", "Maximum Loan Amount", Requisite Banks or "Total Outstanding"; (2) Articles 8 or 9; or (3) this Section 11.3; or (d) To amend or modify any other definition or provision of this Agreement that expressly requires the consent or approval of the Requisite Banks or some other number of Banks. 62 65 Any amendment, modification, supplement, termination, waiver or consent pursuant to this Section 10.2 shall apply equally to and shall be binding upon, Agent and all Banks. 11.4 Costs, Expenses and Taxes. Borrowers shall pay on demand the reasonable costs and expenses, including attorneys' fees, of Agent and Banks in connection with the negotiation, preparation, execution and delivery of the Loan Documents, and of Agent and Banks in connection with the amendment, waiver, refinancing, restructuring, reorganization (including a bankruptcy reorganization) and enforcement or attempted enforcement of the Loan Documents, and any matter related thereto, including, without limitation, filing fees, recording fees, title insurance fees, appraisal fees, search fees, audit costs incurred by Agent or Banks during the continuance of or in connection with the occurrence of an Event of Default and other out-of-pocket expenses and the reasonable fees and out-of-pocket expenses of any legal counsel, independent public accountants and other outside experts retained by Agent or any Banks, and including, without limitation, any costs, expenses or fees incurred or suffered by Agent or any Banks in connection with or during the course of any bankruptcy or insolvency proceedings of any Borrower or any Subsidiary thereof. Borrowers shall pay any and all documentary and other taxes (other than income or gross receipts taxes generally applicable to banks) and all costs, expenses, fees and charges payable or determined to be payable in connection with the filing or recording of this Agreement, any other Loan Document or any other instrument or writing to be delivered hereunder or thereunder, or in connection with any transaction pursuant hereto or thereto, and shall reimburse, hold harmless and indemnify Agent and Banks from and against any and all loss, liability or legal or other expense with respect to or resulting from any delay in paying or failure to pay any tax, cost, expense, fee or charge or that any of them may suffer or incur by reason of the failure of any Party to perform any of its Obligations. Any amount payable to Agent or any Bank under this Section 11.4 shall bear interest from the fifth Banking Day following the date of demand for payment at the rate provided for in Section 3.6. 11.5 Nature of Banks' Obligations. The obligations of Banks hereunder are several and not joint or joint and several. Nothing contained in this Agreement or any other Loan Document and no action taken by the Agent or Banks or any of them pursuant hereto or thereto may, or may be deemed to, make Banks a partnership, an association, a joint venture or other entity, either among themselves or with Borrowers or any Affiliate of Borrowers. Each Bank's obligation to make any Loan pursuant hereto is several and not joint or joint and several, and is conditioned upon the performance by all other Banks of their obligations to make Loans. A default by any Bank will not increase the percentage of the Commitment attributable to any other Bank. Any Bank not in default may, if it desires, assume in such proportion as the nondefaulting Banks agree the obligations of any Bank in default, but is not obligated to do so. 11.6 Survival of Representations and Warranties. All representations and warranties contained herein or in any other Loan Document, or in any certificate or other writing delivered by or on behalf of any one or more of the Parties to any Loan Document, will survive the making and 63 66 repayment of the Loans hereunder and the execution and delivery of the Notes, and have been or will be relied upon by Agent and each Bank, notwithstanding any investigation made by Agent or any Bank or on their behalf. 11.7 Notices. Except as otherwise expressly provided in the Loan Documents: (a) All notices, requests, demands, directions and other communications provided for hereunder or under any other Loan Document must be in writing and must be mailed, telecopied or personally delivered to the appropriate party at the address set forth on the signature pages of this Agreement or other applicable Loan Document or, as to any party to any Loan Document, at any other address as may be designated by it in a written notice sent to all other parties to such Loan Document in accordance with this Section 11.7; and (b) Any notice, request, demand, direction or other communication given by telecopier must be confirmed within 48 hours by letter mailed or delivered to the appropriate party at its respective address. Except as otherwise expressly provided in any Loan Document, if any notice, request, demand, direction or other communication required or permitted by any Loan Document is given by mail it will be effective on the earlier of receipt or the third calendar day after deposit in the United States mail with first class or airmail postage prepaid; if given by telecopier, upon electronic confirmation of receipt, and if given after 4:30 p.m., effective on the next business day; or if given by personal delivery when delivered. 11.8 Execution of Loan Documents. Unless Agent otherwise specifies with respect to any Loan Document, this Agreement and any other Loan Document may be executed in any number of counterparts and any party hereto or thereto may execute any counterpart, each of which when executed and delivered will be deemed to be an original and all of which counterparts of this Agreement or any other Loan Document, as the case may be, when taken together will be deemed to be but one and the same instrument. The execution of this Agreement or any other Loan Document by any party hereto or thereto will not become effective until counterparts hereof or thereof, as the case may be, have been executed by all the parties hereto or thereto. 11.9 Sharing of Setoffs. Each Bank severally agrees that if it, through the exercise of any right of setoff, banker's lien or counterclaim against Borrowers, or otherwise receives payment of the Obligations held by it that is ratably more than any other Bank, through any means, receives in payment of the Obligations held by that Bank, then: (a) The Bank exercising the right of setoff, banker's lien or counterclaim or otherwise receiving such payment shall purchase, and shall be deemed to have simultaneously purchased, from the other Bank a participation in the Obligations held by the other Bank and shall pay to the other Bank a purchase price in an amount so that the share of the Obligations held by each Bank after the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment shall be in the same proportion that existed prior to the exercise of the right of setoff, banker's lien or counterclaim or receipt of payment; and (b) Such other adjustments and purchases of participations shall be made from time to time as shall be equitable to ensure that all of the Banks share any payment obtained in respect of the Obligations ratably in accordance with each Bank's share of the Obligations immediately prior to, and without taking into 64 67 account, the payment; provided that, if all or any portion of a disproportionate payment obtained as a result of the exercise of the right of setoff, banker's lien, counterclaim or otherwise is thereafter recovered from the purchasing Bank by Borrowers or any Person claiming through or succeeding to the rights of Borrowers, the purchase of a participation shall be rescinded and the purchase price thereof shall be restored to the extent of the recovery, but without interest. Each Bank that purchases a participation in the Obligations pursuant to this Section 11.9 shall from and after the purchase have the right to give all notices, requests, demands, directions and other communications under this Agreement with respect to the portion of the Obligations purchased to the same extent as though the purchasing Bank were the owner of the Obligations purchased. Each Borrower expressly consents to the foregoing arrangements and agrees that any Bank holding a participation in an Obligation so purchased may exercise any and all rights of setoff, banker's lien or counterclaim with respect to the participation as fully as if the Bank were the original owner of the Obligation purchased; provided, however, that each Bank agrees that it shall not exercise any right of setoff, banker's lien or counterclaim without first obtaining the consent of the Requisite Banks. 11.10 Binding Effect; Assignment. This Agreement and the other Loan Documents shall be binding upon and shall inure to the benefit of the parties hereto and thereto and their respective successors and assigns, except that Borrowers and/or their Affiliates may not assign their rights hereunder or thereunder or any interest herein or therein without the prior written consent of all the Banks. Banks reserve the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or in any interest in, such Bank's rights and obligations under the Loan Documents, except that no Bank shall have the right to sell, assign, pledge or transfer any participation in its rights hereunder or any interest herein (other than to a Federal Reserve Bank for 90 days or less or to any Affiliate of such Bank) without the consent of the Agent and Requisite Banks. 11.11 Assignment of Deposits. As security for the prompt payment and performance of all Obligations, Borrowers hereby assigns to Agent and Banks a security interest in all their right, title, and interest in and to any and all deposit accounts now or hereafter maintained with California Bank & Trust, Sumitomo Bank of California, Agent or any Bank and the proceeds thereof. 11.12 Participation of Loan. Banks shall have the right to participate, sell or assign interests in the Loans with financial institutions on such terms and conditions as may be acceptable to Agent and Requisite Banks. 11.13 Indemnity by Borrowers. Borrowers agree to indemnify, save and hold harmless Agent and Banks and their directors, officers, agents, attorneys and employees (collectively the "Indemnitees") from and against: (a) Any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person (other than Agent or a Bank) if the claim, demand, action or cause of action directly or indirectly relates to a claim, demand, action or cause of action that such Person has or asserts against Borrowers, any Affiliate of Borrowers or any officer, director or shareholder of Borrowers and arises out of or relates to the relationship between 65 68 Borrowers and Banks under any of the Loan Documents or the transactions contemplated thereby; and (b) Any and all liabilities, losses, costs or expenses (including attorneys' fees and disbursements and other professional services) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action or cause of action; provided that no Indemnitee shall be entitled to indemnification for any loss caused by its own gross negligence or willful misconduct. Each Indemnitee is authorized to employ counsel of its own choosing in enforcing its rights hereunder and in defending against any claim, demand, action or cause of action covered by this Section 11.13; provided that each Indemnitee shall endeavor, in connection with any matter covered by this Section 11.13 which also involves other Indemnitees, to use reasonable efforts to avoid unnecessary duplication of effort by counsel for all Indemnitees. Any obligation or liability of Borrowers to any Indemnitee under this Section 11.13 shall be and hereby is covered and secured by the Loan Documents and the Collateral, and shall survive the expiration or termination of this Agreement and the repayment of all Loans and the payment and performance of all other Obligations owed to Agent and/or Banks. 11.14 Nonliability of Banks. Borrowers acknowledge and agree that: (a) Any inspections of Collateral made by or through Agent or any Bank are for purposes of administration of the Loan only and Borrowers are not entitled to rely upon the same; (b) By accepting or approving anything required to be observed, performed, fulfilled or given to Agent or the Banks pursuant to the Loan Documents, including any certificate, financial statement, insurance policy or other document, neither Agent nor any Bank shall be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Agent or Banks; (c) The relationship between Borrowers and Agent and Banks is, and shall at all times remain, solely that of borrower and lenders; neither Agent nor any Bank shall under any circumstance be construed to be partners or joint venturers of Borrowers or its Affiliates; neither Agent nor any Bank shall under any circumstance be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrowers or their Affiliates, or to owe any fiduciary duty to Borrowers or their Affiliates; neither Agent nor any Bank shall undertake or assume any responsibility or duty to Borrowers or their Affiliates to select, review, inspect, supervise, pass judgment upon or inform Borrowers or their Affiliates of any matter in connection with their Property, any Collateral held by Agent or any Bank or the operations of Borrowers or their Affiliates; Borrowers and their Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or 66 69 assumed by Agent or Banks in connection with such matters is solely for the protection of Agent and Banks and no Borrower or any other Person is entitled to rely thereon; and (d) Agent and Banks shall not be responsible or liable to any Person for any loss, damage, liability or claim of any kind relating to injury or death to Persons or damage to Property caused by the actions, inaction or negligence of Borrowers and/or their Affiliates and Borrowers hereby indemnify and hold Bank harmless from any such loss, damage, liability or claim. 11.15 No Third Parties Benefited. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of Borrowers and Agent and Banks in connection with the Loans, and is made for the sole protection of Borrowers and Agent and Banks, and their successors and assigns. Except as provided in Section 11.13, no other Person shall have any rights of any nature hereunder or by reason hereof. 11.16 Further Assurances. Borrowers and their Subsidiaries shall, at their expense and without expense to Agent or any Bank, do, execute and deliver such further acts and documents as Agent or any Bank from time to time reasonably require for the assuring and confirming unto Agent and Banks of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document, or for assuring the validity, perfection, priority or enforceability of any Lien under any Loan Document. 11.17 Integration. This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of Agent or Banks in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 11.18 Governing Law. Except to the extent otherwise provided therein, each Loan Document shall be governed by, and construed and enforced in accordance with, the local Laws of California; provided that the local Laws of California shall not apply with respect to any foreclosure of real Property Collateral located outside California, and in no event shall California Code of Civil Procedure Sections 726 and/or 580a and/or 580b and/or 580d apply to any such foreclosure outside of California or to the right of Agent and Banks to obtain a deficiency judgment for all Obligations remaining due following such foreclosure. 67 70 11.19 Severability of Provisions. Any provision in any Loan Document that is held to be inoperative, unenforceable or invalid as to any party or in any jurisdiction shall, as to that party or jurisdiction, be inoperative, unenforceable or invalid without affecting the remaining provisions or the operation, enforceability or validity of that provision as to any other party or in any other jurisdiction, and to this end the provisions of all Loan Documents are declared to be severable. 11.20 Headings. Article and Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 11.21 Time of the Essence. Time is of the essence of the Loan Documents. 11.22 Securities Representation. Each Bank hereby represents that any disposition by it of all or any part of its rights under the Loan Documents shall not violate Section 5 of the Securities Act of 1933 to the extent, if any, applicable. 11.23 Joint Borrower Provisions Borrowers acknowledge and agree that Borrowers shall be jointly and severally liable for all obligations arising under this Agreement, any/or Loan Documents. In furtherance thereof, Borrowers acknowledge and agree as follows: (a) In lieu of maintaining accounts in the name of each of the Persons comprising Borrower (for purposes of this Section, each such Person being referred to as a "Borrowing Entity"), Agent shall maintain a single designated deposit account for Borrowers. Any advance made by Bank hereunder shall be made jointly and severally to all Borrowing Entities. Any payments received by any Bank likewise shall be credited to all Borrowing Entities. While it is anticipated that SCC, Inc. will make Requests for Loans or for Standby Letters of Credit, Requests for Loans or for Standby Letters of Credit may be made by any Borrowing Entity and Agent and any Bank, in its discretion, is authorized to honor and rely upon any such Request or any instructions received from any Responsible Official of any Borrowing Entity. It is expressly agreed and understood by each Borrowing Entity that Agent and each Bank shall have no responsibility to inquire into the appointment, allocation or disposition of any Loans made to Borrowers. All Loans are to be made for the collective account of Borrowers. For the purpose of implementing the joint borrower provisions of the Loan Documents, including without limitation the giving and receiving of notices and other communications, the making of Requests for Loans or Requests for Standby Letters of Credit, the execution and delivery of certificates and the receiving and allocating of disbursements from Bank, Borrowers hereby irrevocably appoint each other as the agent and attorney-in-fact for all purposes of the Loan Documents. (b) It is understood and agreed that the handling of this credit facility on a joint borrowing basis as set forth in this Agreement is solely as an accommodation to Borrowers 68 71 and at the request of Borrowers, and that Agent and Banks shall incur no liability to Borrowers or any Borrowing Entity as a result thereof. To induce Agent and Banks to do so, and in consideration thereof, each Borrowing Entity hereby agrees to indemnify Agent and Banks and hold Agent and Banks harmless from and against any and all liabilities, expenses, losses, damages and/or claims of damage or injury asserted against Agent and Banks by Borrowers or by any other Person arising from or incurred by reason of Agent's or any Bank's handling of the financing arrangement of Borrowers as herein provided, reliance by Agent and Banks on any requests or instructions from any Borrowing Entity, or any other action taken by Agent and Banks. (c) Each of the Borrowers represents and warrants to Agent and Banks that the request for joint handling of the Loans was made jointly by the Borrowing Entities and that the Borrowing Entities are engaged in an integrated operation that requires financing on a basis permitting the availability of credit from time to time to each of the Borrowing Entities as required for the continued successful operation of each of them and their integrated operations. Each Borrowing Entity expects to derive benefit, directly or indirectly, from such availability because the successful operation of the Borrower is dependent on the continued successful performance of the functions of the integrated group. (d) Each Borrower acknowledges that the liens and security interests created or granted herein and by the other Loan Documents will or may secure obligations of persons or entities other than itself and, in full recognition of that fact, each Borrower consents and agrees that any action by Agent or any Bank with respect to the following shall not affect the enforceability or security hereof or of any other Loan Document: (1) supplement, modify, amend, extend, renew, accelerate, or otherwise change the time for payment or the terms of the obligations of the other Borrowers or any part thereof, including any increase or decrease of the rate(s) of interest thereon; (2) supplement, modify, amend or waive, or enter into or give any agreement, approval or consent with respect to, the obligations of the other Borrowers or any part thereof or any of the Loan Documents or any additional security or guaranties, or any condition, covenant, default, remedy, right, representation or term thereof or thereunder; (3) accept new or additional instruments, documents or agreements in exchange for or relative to any of the Loan Documents or the obligations of Borrowers or any part thereof; (4) accept partial payments on the obligations of Borrowers; 69 72 (5) receive and hold additional security or guaranties for the obligations of Borrowers or any part thereof; (6) release, reconvey, terminate, waive, abandon, subordinate, exchange, substitute, transfer and enforce any security or guaranties, and apply any security and direct the order or manner of sale thereof as Agent or Banks in their sole and absolute discretion may determine; (7) release any person or entity or any guarantor from any personal liability with respect to the obligations of Borrowers or any part thereof; (8) settle, release on terms satisfactory to Agent or Banks or by operation of applicable laws or otherwise liquidate or enforce any obligations of Borrowers and any security or guaranty therefor in any manner, consent to the transfer of any security and bid and purchase at any sale; and (9) consent to the merger, change or any other restructuring or termination of the corporate existence of Borrowers or any other person, and correspondingly restructure the obligations of Borrowers, and any such merger, change, restructuring or termination shall not affect the liability of Borrowers or the continuing existence of any lien or security interest hereunder, under any other Loan Document to which any Borrower is a party or the enforceability hereof or thereof with respect to all or any part of the obligations of Borrowers. Upon the occurrence of and during the continuance of any Event of Default, Agent and Banks may enforce this Agreement and the other Loan Documents independently as to each Borrower and independently of any other remedy or security Agent or Banks at any time may have or hold in connection with the obligations of Borrowers, and it shall not be necessary for Agent or Banks to marshal assets in favor of any of the Borrowers or any other person or entity or to proceed upon or against and/or exhaust any other security or remedy before proceeding to enforce this Agreement and the other Loan Documents. Each of the Borrowers expressly waives any right to require Agent or Banks to marshal assets in favor of any Borrower or any other person or entity or to proceed against any other person or entity or any Collateral provided by any other person, and agrees that Agent or Banks may proceed against any persons or entities and/or Collateral in such order as it shall determine in its sole and absolute discretion. Agent or Banks may file a separate action or actions against any Borrower, whether action is brought or prosecuted with respect to any other security or against any other person, or whether any other person or entity is joined in any such action or actions. Each of the Borrowers agrees that Agent or Banks and each of the Borrowers and any other person or entity may deal with each other in connection with the 70 73 obligations of Borrowers or otherwise, or alter any contracts or agreements now or hereafter existing between any of them, in any manner whatsoever, all without in any way altering or affecting the security of this Agreement or the other Loan Documents. The rights of Agent and Banks hereunder and under the other Loan Documents shall be reinstated and revived, and the enforceability of this Agreement and the other Loan Documents shall continue, with respect to any amount at any time paid on account of the obligations of Borrowers which thereafter shall be required to be restored or returned by Agent and Bank upon bankruptcy, insolvency or reorganization of any Borrower or any other person, or otherwise, all as though such amount had not been paid. The enforceability of this Agreement and the other Loan Documents at all times shall remain effective even though the obligations of Borrowers, including any part thereof or any other security or guaranty therefor, may be or hereafter may become invalid or otherwise unenforceable as against any of the Borrowers or any other person or entity and whether or not any of the Borrowers or any other person or entity shall have any personal liability with respect thereto. Each of the Borrowers expressly waives any and all defenses now or hereafter arising or asserted by reason of (a) any disability or other defense of any of the other Borrowers or any other person or entity with respect to the obligations of Borrowers, (b) the unenforceability or invalidity of any security or guaranty for the obligations of Borrowers or the lack of perfection or continuing perfection or failure of priority of any security for the obligations of Borrowers, (c) the cessation for any cause whatsoever of the liability of any other Borrower or any other person or entity (other than by reason of the full payment and performance of all obligations of Borrowers), (d) any failure of Agent or any Bank to marshal assets in favor of any of the Borrowers or any other person, (e) any failure of Agent or any Bank to give notice of sale or other disposition to any of the other Borrowers or any other person or entity or any defect in any notice that may be given in connection with any sale or disposition, (f) any failure of Agent or any Bank to comply in any non-material respect with applicable laws in connection with the sale or other disposition of any Collateral or other security for any obligation of Borrowers, (g) any act or omission of Agent or any Bank or others that directly or indirectly results in or aids the discharge or release of any Borrower or any other person or entity or the obligations of Borrowers or any other security or guaranty therefor by operation of law or otherwise, (h) any law which provides that the obligation of a surety or guarantor must neither be larger in amount nor in other respects more burdensome than that of the principal or which reduces a surety's or guarantor's obligation in proportion to the principal obligation, (i) any failure of Agent or any Bank to file or enforce a claim in any bankruptcy or other proceeding with respect to any person, (j) the election by Agent or any Bank, in any bankruptcy proceeding of any person, of the application or non-application of Section 1111(b)(2) of the United States Bankruptcy Code, (k) any extension of credit or the grant of any lien under Section 364 of the United States Bankruptcy Code, (l) any use of cash collateral under Section 363 of the United States Bankruptcy Code, (m) any agreement or stipulation with respect to the provision of adequate protection in any bankruptcy proceeding of any person, (n) the avoidance of any lien or security interest in favor of Agent 71 74 or any Bank for any reason, or (o) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, liquidation or dissolution proceeding commenced by or against any person, including any discharge of, or bar or stay against collecting, all or any of the obligations of Borrowers (or any interest thereon) in or as a result of any such proceeding. (e) Each of the Borrowers represents and warrants to Agent and Banks that such Borrower has established adequate means of obtaining from the other Borrowers, on a continuing basis, financial and other information pertaining to the businesses, operations and condition (financial and otherwise) of the other Borrowers and their respective properties, and each of the Borrowers now is and hereafter will be completely familiar with the businesses, operations and condition (financial and otherwise) of the other Borrowers and their respective properties. Each of the Borrowers hereby expressly waives and relinquishes any duty on the part of Agent or any Bank to disclose to such Borrower any matter, fact or thing related to the businesses, operations or condition (financial or otherwise) of any other Borrower or such other Borrower's properties, whether now known or hereafter known by Agent or any Bank during the life of this Agreement. With respect to any of the obligations of Borrowers, Agent and Banks need not inquire into the powers of any of the Borrowers or the officers or employees acting or purporting to act on its behalf. (f) Notwithstanding anything to the contrary elsewhere contained herein or in any other Loan Document to which any Borrower is a party, each of the Borrowers hereby waives with respect to each other Borrower and its respective successors and assigns (including any surety) and any other party any and all rights at law or in equity, to subrogation, to reimbursement, to exoneration, to contribution, to setoff or to any other rights that could accrue to a surety against a principal, to a guarantor against a maker or obligor, to an accommodation party against the party accommodated, or to a holder or transferee against a maker and which each of the Borrowers may have or hereafter acquire against any other Borrower or any other party in connection with or as a result of any Borrower's execution, delivery and/or performance of this Agreement or any other Loan Document to which any such Borrower is a party until the Obligations hereunder are paid in full. Each of the Borrowers agrees that it shall not have or assert any such rights against any other Borrower or any such Borrower's successors and assigns or any other person or entity (including any surety), either directly or as an attempted setoff to any action commenced against such Borrower by the other such Borrower (as borrower or in any other capacity) or any other person until the obligations hereunder are paid in full. Each of the Borrowers hereby acknowledges and agrees that this waiver is intended to benefit Agent and Banks and shall not limit or otherwise affect any of the Borrowers' liability hereunder, under any other Loan Document to which any Borrower is a party, or the enforceability hereof or thereof. (g) Each of the Borrowers warrants and agrees that each of the waivers and consents set forth herein is made with full knowledge of its significance and consequences, 72 75 with the understanding that events giving rise to any defense waived may diminish, destroy or otherwise adversely affect rights which each of the Borrowers otherwise may have against the other Borrowers, Agent or any Bank, or others, or against any Collateral. If any of the waivers or consents herein are determined to be contrary to any applicable law or public policy, such waivers and consents shall be effective to the maximum extent permitted by law. 11.24 Waiver of Jury Trial. The parties to this Agreement acknowledge that jury trials often entail additional expenses and delays not occasioned by nonjury trials. The parties to this Agreement further agree and stipulate that a fair trial may be had before a state or federal judge by means of a bench trial without a jury. In view of the foregoing, and as a specifically negotiated provision of this Agreement, each party to this Agreement hereby expressly waives any right to trial by jury of any claim, demand, action or cause of action (1) arising under this Agreement or any other instrument, document or agreement executed or delivered in connection herewith, or (2) in any way connected with or related or incidental to the dealings of the parties hereto or any of them with respect to this Agreement or any other instrument, document or agreement executed or delivered in connection herewith, or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether sounding in contract or tort or otherwise; and each party hereby agrees and consents that any such claim, demand, action or cause of action shall be decided by court trial without a jury, and that any party to this Agreement may file an original counterpart or a copy of this section with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BORROWERS: 73 76 THE SPORTS CLUB COMPANY, INC. THE SPECTRUM CLUB COMPANY, INC., a Delaware 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 PONTIUS REALTY, INC., L.A./IRVINE SPORTS CLUB, LTD., a California corporation a California limited partnership By: /s/ Timothy O'Brien By: Sports Club, Inc. of California ----------------------------- general partner Timothy O'Brien By: /s/ Timothy O'Brien --------------------------- Its: Chief Financial Officer 74 77 SPORTS CLUB, INC. 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 IRVINE SPORTS CLUB, INC., GREEN VALLEY SPECTRUM CLUB, 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 THE SPORTSMED COMPANY, 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 SCC SPORTS CLUB, INC., a Texas corporation By: /s/ Timothy O'Brien ----------------------------- Timothy O'Brien Its: Chief Financial Officer Borrowers' Address: c/o The Sports Club Company, Inc. 75 78 11100 Santa Monica Boulevard Suite 300 Los Angeles, California 90025 Telephone: (310) 479-5200 Facsimile: (310) 479-5740 AGENT: COMERICA BANK - CALIFORNIA a California banking corporation By: /s/ Joseph Yurosek ----------------------------- Joseph Yurosek Vice President Address: Comerica Bank-California 301 E. Ocean Boulevard, Suite 1800 Long Beach, California 90802 Attn: Joseph Yurosek, Vice President Telecopier: (562) 595-8251 Telephone: (562) 590-2530 76 79 BANKS: COMERICA BANK - CALIFORNIA a California banking corporation By: /s/ Joseph Yurosek ----------------------------- Joseph Yurosek Vice President Address: Comerica Bank-California 301 E. Ocean Boulevard, Suite 1800 Long Beach, California 90802 Attn: Joseph Yurosek, Vice President Telecopier: (562) 595-8251 Telephone: (562) 590-2530 77 EX-10.80 19 EXHIBIT 10.80 1 EXHIBIT 10.80 BANK LOAN - 2/1/99 1ST AMENDMENT 2 FIRST AMENDMENT TO THIRD AMENDED AND RESTATED LOAN AGREEMENT This FIRST AMENDMENT TO THIRD AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment"), dated as of February 1, 1999, is entered into by and among The Sports Club Company, Inc., The Spectrum Club Company, Inc., Pontius Realty, Inc., Sports Club, Inc. of California, Irvine Sports Club, Inc., the SportsMed Company, Inc., formerly HealthFitness Organization of America, Inc., L.A./Irvine Sports clubs, Ltd., Talla New York, Inc., SCC Sports Club, Inc., Spectrum Club/Anaheim Hills, Inc. and Green valley Spectrum club, Inc. (collectively, the "Borrowers"), Comerica Bank-California ("Comerica") and Comerica Bank-California as Agent under, and as defined in, that certain Third Amended and Restated Loan Agreement dated as of February 1, 1999 among the Borrowers, Comerica, and the Agent (the "Loan Agreement"). Capitalized terms used but not otherwise defined in this Amendment shall have the meanings provided in the Loan Agreement. RECITAL The Borrowers have requested that the Loan Agreement, as in effect on the date of this Amendment, be amended in the respect set forth below, and Comerica and the Agent have agreed so to amend the Loan Agreement. NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: Section 1. Amendment. The Loan Agreement shall be amended to delete the definition of "Qualified Stock Repurchase" currently set forth therein in its entirety and to replace it with the following definition: "Qualified Stock Repurchase" means the common stock repurchase program instituted in April, 1998; provided that the aggregate amount expended in repurchasing common stock of SCC, Inc. shall not exceed $10,800,000." Section 2. Effectiveness. This Amendment shall become effective immediately upon its execution by each of the parties hereto, with retroactive effect to February 1, 1999. Section 3. The Borrowers' Representations and Warranties. In order to induce Comerica and the Agent to enter into this Amendment and to amend the Loan Agreement in the manner 3 provided in this Amendment, the Borrowers represent and warrant to Comerica and the Agent as follows: (a) Corporate Power and Authority. Each Borrower has all necessary corporate power and authority to execute, deliver and enter into this Amendment and to carry out the transactions contemplated by, and perform its obligations under, the Loan Agreement, as amended by this Amendment (the "Amended Agreement"). The execution, delivery and performance by each of the Borrowers of the Amended Agreement have been duly authorized by all necessary corporate action on its part. This Amendment has been duly and validly executed and delivered by each of the Borrowers and constitutes its legal, valid and binding obligation, enforceable against each of the Borrowers in accordance with its terms. (b) Authorization of Agreements. The execution and delivery of this Amendment and the performance of the Amended Agreement have been duly authorized by all necessary corporate action of each of the Borrowers, and this Amendment has been duly executed and delivered by each of the Borrowers. (c) Enforceability. The Amended Agreement constitutes the legal, valid and binding obligations of each of the Borrowers, enforceable against it in accordance with its terms except as may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights in general. (d) No Breach. Neither the execution and delivery of this Amendment nor the performance by each of the Borrowers of the Amended Agreement will conflict with or result in a breach of , or require any consent under, the constitutional documents of any Borrower, or any applicable governmental rule or any agreement or instrument to which any Borrower is a party or by which it or any of its property is bound or to which it is subject, or constitute a default under, or result in the acceleration or mandatory prepayment of, any indebtedness evidenced by or termination of any such agreement or instrument, or result in the creation or imposition of any lien upon any property of any Borrower pursuant to the terms of any such agreement or instrument. (e) Existing Representations and Warranties. Each representation and warranty made by the Borrowers in the Loan Agreement is true and correct on and as of the date of this Amendment as though made on the date hereof, except to the extent that such representations and warranties relate solely to an earlier date. Section 4. Miscellaneous. 2 4 (a) Reference to and Effect on the Loan Agreement and Loan Documents. (i) Except as specifically amended by this Amendment, the Loan Agreement and the other Loan Documents shall remain in full force and effect and are hereby ratified and confirmed. (ii) The execution, delivery and performance of this Amendment shall not, except as expressly provided herein, constitute a waiver of any provision of, or operate as a waiver of any right, power or remedy of the Agent or Comerica under, the Loan Agreement or any of the other Loan Documents. (iii) Upon the condition precedent set forth in Section 2 of this Amendment being satisfied, this Amendment shall be construed as one with the Loan Agreement, and the Loan Agreement shall, where the context requires, be read and construed throughout so as to incorporate this Amendment. (b) Execution in Counterparts; Effectiveness. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties to this Amendment may execute this Amendment by signing any such counterpart. (c) Headings. Section and subsection headings in this Amendment are included for convenience of reference only and shall not constitute a part of this Amendment for any other purpose or be given any substantive effect. (d) Governing Law. This Amendment shall be governed by, and construed in accordance with, the law of the state of California. IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first above written. COMERICA BANK - CALIFORNIA a California banking corporation By: /s/ Joseph Yurosek ----------------------------------- Joseph Yurosek Its: Vice President 3 5 COMERICA BANK - CALIFORNIA a California banking corporation, as Agent By: /s/ Joseph Yurosek ------------------------------------------- Joseph Yurosek Its: Vice President 4 6 BORROWERS:
THE SPORTS CLUB COMPANY, INC., THE SPECTRUM CLUB COMPANY, INC., a Delaware 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 PONTIUS REALTY, INC., L.A./IRVINE SPORTS CLUB, LTD., a California corporation a California limited partnership By: /s/ Timothy O'Brien ------------------------------------- By: /s/ Timothy O'Brien Timothy O'Brien --------------------------------------- Timothy O'Brien Its: Chief Financial Officer By: /s/ Timothy O'Brien ------------------------------------- Timothy O'Brien Its: Chief Financial Officer SPORTS CLUB, INC. 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 IRVINE SPORTS CLUB, INC., GREEN VALLEY SPECTRUM CLUB, INC., a California corporation 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., SPECTRUM CLUB/ANAHEIM HILLS, INC.,
5 7
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 SCC SPORTS CLUB, INC., a Texas corporation By: /s/ Timothy O'Brien --------------------------------------- Timothy O'Brien Its: Chief Financial Officer
6 EX-10.81 20 EXHIBIT 10.81 1 EXHIBIT 10.81 GIBBONS EMPLOYMENT OCTOBER 16, 1998 2 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is made and entered into this 16th day of October 1998, by and between THE SPORTS CLUB COMPANY, INC., a Delaware corporation (the "Company"), and JOHN M. GIBBONS ("Executive"). 1. EFFECTIVE DATE. This Agreement, and all the terms and provisions hereof, shall be deemed effective as of June 1, 1998 (the "Effective Date"). 2. ENGAGEMENT AND DUTIES. (a) Subject to the terms and conditions set forth in this Agreement, as of the Effective Date, the Company shall engage and employ Executive as an officer of the Company, with the title and designation of President and Chief Operating Officer of the Company, and Executive hereby accepts such engagement and employment. (b) During the term of this Agreement, Executive shall report to the Chief Executive Officer of the Company. Executive's duties and responsibilities during the term of this Agreement shall be those which are normally and customarily vested in the office of President of a corporation, subject to the supervision, direction and control of the Chief Executive Officer and the Board of Directors of the Company (the "Board"). During the term of this Agreement, Executive shall serve, without additional compensation (unless otherwise agreed between the Company and the Executive) in such other offices or capacities (whether for the Company or any subsidiary thereof) to which Executive may be elected by the Board (or by the Board of Directors of any such subsidiary), or as a member of the Board, if so elected by the shareholders of the Company or of any such subsidiary. During the term of this Agreement, the Company may also utilize Executive in any other work or activity in furtherance of the Company's business in which his talents may be applied in a manner commensurate with his position, training, skills and abilities, and Executive shall observe and abide by the Certificate of Incorporation, Bylaws, rules and regulations established from time to time by the Company or the Board applicable to its employees. (c) Subject to the terms and provisions of this Agreement, it is the intent of the parties hereto that Executive shall serve as a member of the Board of Directors of the Company; to serve in such capacity upon his election by the Board and at the pleasure of the shareholders until such time as his successor has been duly elected and qualified. (d) During the term of this Agreement, Executive shall devote his primary business time, energies, skills, effort and attention to his duties hereunder, and will not, without the prior written consent of the Company, which consent will not be unreasonably withheld, 3 render any material services to any other business activity. Executive will use his best efforts and abilities faithfully and diligently to promote the Company's business interests. (e) Except for routine travel incident to the business of the Company, Executive shall perform his duties and obligations under this Agreement principally from an office provided by the Company at its principal corporate offices presently located at 11100 Santa Monica Boulevard, or such other location in the greater Los Angeles metropolitan area as the Board may from time to time determine; provided that, Executive may, from time to time, perform such duties from his home office in Santa Barbara, California. The Company shall provide and maintain, or cause to be provided and maintained, such private office, secretarial assistance and other facilities, equipment and supplies as it deems reasonable necessary for Executive's performance of his duties hereunder. 3. TERM OF EMPLOYMENT. Executive's employment pursuant to this Agreement shall commence on the date set forth above and shall terminate on the earliest to occur of the following: (a) upon the death of Executive; (b) upon delivery to Executive of written notice of termination by the Company if Executive shall suffer a physical or mental disability which renders Executive, in the reasonable judgment of the Board, unable to perform his duties and obligations under this Agreement for 90 days during any 12-month period; (c) upon delivery to Executive of written notice of termination by the Company with or without cause. For purposes of this Agreement, termination "with cause" shall mean a determination based in fact made by the Board of Directors of the Company or the Chief Executive Officer that (i) Executive has engaged or otherwise participated in any misconduct that is materially injurious or harmful to the Company; (ii) Executive has been adjudged guilty of a felony (or has entered a plea of nolo contendere to any criminal charge which is classified as a felony under either state or federal law); or (iii) Executive has demonstrated a gross inattention to his duties, breached any fiduciary duty he may owe as an officer of the Company or has breached and/or violated a material term or provision of this Agreement after having had thirty (30) days' prior written notice from the Company describing such violation or breach and demanding that the same be cured or corrected and such cure or correction has not occurred within such thirty (30) day period; (d) upon delivery to the Company of written notice of termination by the Executive. 4. COMPENSATION; EXECUTIVE BENEFIT PLANS. 2 4 (a) Commencing as of the Effective date, the Company shall pay to Executive a base salary at an annual rate of Two Hundred Fifty Thousand Dollars ($250,000.00) during the Term pursuant to this Agreement. The base salary shall be payable in monthly or other periodic installments throughout the year in the same manner and at the same times that the Company pays its other executive officers. Executive's annual base salary shall be subject to review on each anniversary of this Agreement, and may, in the sole and absolute discretion of the Board, be increased at that time. (b) At the sole discretion of the Board Executive may be paid a bonus of up to twenty percent (20%) of Executive's annual gross base salary ("Bonus"). In addition to the base salary and Bonus to be paid to Executive hereunder, Executive shall be entitled to participate in any management bonus plans that the Board may elect to implement, in its sole discretion, at any time and from time to time. If any such plans are implemented, Executive's participation therein shall be subject to the terms and conditions thereof, together with any other terms and conditions that the Board (or any Committee of the Board which shall have been empowered to administer and oversee any such plan) may impose upon Executive in connection therewith. (c) Executive shall be entitled each year to vacation for a period of three weeks, during which time all amounts to which he is entitled hereunder shall be paid in full. (d) The Company shall reimburse Executive for all reasonable costs and expenses, including but not limited to, travel, entertainment, meals and lodging, which Executive incurs in connection with the performance of his duties and obligations under this Agreement in a manner consistent with the Company's practices and policies theretofore adopted or approved by the Board for executive officers. In addition, the parties hereto specifically recognize that by reason of his position Executive is expected to join or continue his membership in certain clubs or other organizations. The Executive shall be reimbursed for all such expenses, including dues actually incurred, in an amount not to exceed $4,500. (e) The Company may deduct from any compensation payable to Executive hereunder the minimum amounts sufficient to cover applicable federal, state and/or local income tax withholding, old-age and survivors' and other social security payments, state disability and other insurance premiums and payments. (f) If, at any time Executive's employment with the Company is terminated other than pursuant to Section 3(d) hereof or for cause pursuant to Section 3(c) hereof, then for a period of twelve months following such termination date the Company shall continue to pay to Executive the annual base salary being paid to Executive during the year in which such termination shall occur. 5. EXECUTIVE BENEFIT PLANS. During the Term, commencing as of the Effective Date, Executive shall be eligible to participate in all operative employee benefit and welfare plans and programs of the Company then in effect from time to time and in respect of which all executive officers of the Company generally are entitled to participate ("Company 3 5 Executive Benefit Plans"), including, to the extent then in effect, group life, medical, disability and other insurance plans; provided, however, that nothing contained in this Section 5 shall, in any manner whatsoever, directly or indirectly, require or obligate the Company to adopt or implement, or to prevent, preclude or otherwise prohibit the Company from amending, modifying, curtailing, discontinuing or otherwise terminating, any Company Executive Benefit Plan at any time (whether during or after the term hereof). Executive acknowledges and agrees that the Company shall have the option, but not the obligation, to obtain key man life insurance with respect to Executive. 6. TEMPORARY LIVING EXPENSES. EXECUTIVE SHALL BE ENTITLED TO RECEIVE, FOR LIVING EXPENSES, THE SUM OF FORTY THOUSAND DOLLARS ($40,000) EACH YEAR OF THE CONTRACT. EACH SUCH FORTY THOUSAND DOLLAR ($40,000) SUM IS PAYABLE IN EQUAL MONTHLY OR OTHER PERIODIC INSTALLMENTS THROUGHOUT THE YEAR IN THE SAME MANNER AND AT THE SAME TIMES THAT THE COMPANY PAYS EXECUTIVE HIS BASE SALARY. 7. OTHER BENEFITS. During the Term, commencing as of the Effective Date, Executive shall be entitled to an automobile allowance equal to $650.00 per month and a cellular phone paid for by the Company. 8. STOCK OPTIONS. Effective April 15, 1998, the Company granted to Executive an option (the "Option") to purchase up to 30,000 shares of the Company's Common Stock, par value $0.01 per share (the "Option Shares"), under the Company's 1994 Stock Option Incentive Plan, pursuant to a Stock Option Agreement in the form attached hereto as Exhibit "A" (the "Stock Option Agreement"). The exercise price per share for the Option Shares shall be set in the Stock Option Agreement at $8.00 per share. The Option shall vest in three equal installments on April 15, 1999, April 15, 2000 and April 15, 2001, respectively. The vesting of the Option shall accelerate and the Option shall become fully vested upon a Change in Control (as defined below). 9. CHANGE OF CONTROL. For purposes of this Agreement, a "Change of Control" of the Company shall be deemed to have occurred if: (a) there shall have been consummated any consolidation or merger of the Company in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the State of the Company's incorporation; (b) there shall have been consummated any sale, lease, exchange or other transfer, whether in a single or a series of related transactions, of all or substantially all the assets of the Company; or (c) there shall have been consummated any reverse merger or any other such transaction in which fifty percent (50%) or more of the Company's outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger. 4 6 10. CONFIDENTIALITY AND TRADE SECRETS. Executive shall not, at any time during the Term and for a period of five (5) years thereafter, exploit, use for any purpose not specifically related to Executive's employment by the Company pursuant to the terms of this Agreement or disclose, directly or indirectly, to any person (except as required by law after first notifying the Company and giving it an opportunity to object) any confidential information, including, without limitation, price lists, pricing information, marketing plans or strategies, customer lists, customer names, non-public financial information, trade secrets, know-how, unprinted or printed data, and related intangible property developed during or prior to the term of this Agreement, belonging to, used by, or developed by or for the benefit of the Company (collectively, "Trade Secrets"); provided, however, that any such information that may be obtained by a reasonably diligent businessman from readily available and public sources of information shall not be deemed to be Trade Secrets under this Agreement, unless such information was first published in breach of this Agreement or any other confidentiality agreement entered into between Executive and the Company. 11. RETURN OF CORPORATE PROPERTY AND TRADE SECRETS. Upon any termination of this Agreement, Executive shall turn over to the Company all property, writings or documents then in his possession or under his control, belonging to or relating to the affairs of the Company or comprising or relating to Trade Secrets. 12. DISCOVERIES AND INVENTIONS. If Executive, while employed by the Company, makes, either solely or jointly with others, any discovery, improvement or invention which would pertain or relate in any way to the business, services, products, publications or processes of the Company or its subsidiaries, such discovery, improvement or invention (whether or not susceptible of patent, copyright or trademark protection) shall be and remain the exclusive property of the Company. Executive shall execute and deliver to the Company, without further compensation, any and all documents which the Company deems necessary or appropriate to prepare or prosecute applications for patents, copyrights or trademarks upon such discovery, improvement or invention; to enable the Company to acquire Executive's entire right, title and interest in and to such discovery, improvement or invention (including any patents, copyrights or trademarks therefor); and other wise more fully and perfectly to evidence the Company's ownership thereof. This Section 12 shall not apply to any discovery, improvement or invention (a) for which no equipment, supplies, facility or Trade Secrets of the Company were used, or (b) which was developed after the date hereof entirely on Executive's own time and (i) does not relate to the business of the Company or to its actual or demonstrably anticipated research or development, or (ii) does not result from any work performed by Executive for the Company. 13. INJUNCTIVE RELIEF. Executive hereby recognizes, acknowledges and agrees that in the event of any breach by Executive of any of his covenants, agreements, duties or obligations hereunder, the Company would suffer great and irreparable harm, injury and damage, the Company would encounter extreme difficulty in attempting to prove the actual 5 7 amount of damages suffered by the Company as a result of such breach, and the Company would not be reasonably or adequately compensated by an award of damages in any action at law. Executive therefore acknowledges and agrees that, in addition to any other remedy the Company may have at law, in equity, by statute or otherwise, in the event of any breach by Executive of any of his covenants, agreements, duties or obligations hereunder, the Company shall be entitled to seek and receive temporary, preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to enforce any of the rights of the Company, or any of the covenants, agreements, duties or obligations of Executive hereunder, and/or otherwise to prevent the violation of any of the terms or provisions hereof, all without the necessity of proving the amount of any actual damage to the Company or any affiliate thereof resulting therefrom; provided, however, that nothing contained in this Section 13 shall be deemed or construed in any manner whatsoever as a waiver by the Company of any of the rights which the Company may have against Executive at law, in equity, by statute or otherwise arising out of, in connection with or resulting from the breach by Executive of any of his covenants, agreements, duties or obligations hereunder. 14. INDEMNIFICATION AGREEMENT; INSURANCE. In connection with Executive's employment, Executive and the Company have previously entered into an Indemnification Agreement (the "Indemnification") pursuant to which the Company will indemnify Executive to the fullest extent permitted by applicable law, subject to the terms and conditions of the Indemnification. In addition, the Company has purchased and will maintain in full force and effect during the term hereof a policy of officers' and directors' insurance, under which all officers and directors of the Company (including Executive) will be insured against liability for certain acts and omissions, subject to the terms and conditions thereof; provided that, nothing contained in this Section 14 shall preclude or limit the Company's ability to terminate such insurance coverage at any time if it, in the good faith determination of the Board, determines that the cost of maintaining such insurance in effect is prohibitive. 15. MISCELLANEOUS. (a) Notices. All notices, requests and other communications required or permitted hereunder (collectively, "Notices") shall be in writing, and shall be delivered by personal service, facsimile transmission or by United States first class, registered or certified mail (return receipt requested), postage prepaid, duly addressed to the party to be notified at the applicable address set forth below: If to Company: The Sports Club Company 11100 Santa Monica Boulevard Suite 300 6 8 Los Angeles, California 90025 If to Executive: John M. Gibbons 1455 E. Mountain Drive Montecito, California 93108 Any Notice shall be deemed duly given when received by the addressee thereof, provided that any Notice sent by first-class registered or certified mail shall be deemed to have been duly given three days from date of deposit in the United States mails, unless sooner received. Either party may from time to time change its address for further Notices hereunder by giving notice to the other party in the manner prescribed in this Section 15(a). (b) Entire Agreement. This Agreement (together with the Indemnification and Stock Option Agreement) contains the sole and entire agreement and understanding of the parties with respect to the entire subject matter hereof, and supersedes any and all prior contemporaneous written and oral discussions, negotiations, commitments and understandings related to the subject matter of this Agreement. No representations, oral or otherwise, express or implied, other than those contained in this Agreement have been relied upon by any party to this Agreement. (c) Governing Law.This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, without regard to conflicts of law principles thereof. (d) Captions. The various captions of this Agreement are for reference only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. (e) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. (f) Business Day. If the last day permissible for delivery of any Notice under any provision of this Agreement, or for the performance of any obligation under this Agreement, shall be other than a business day, such last day for such Notice or performance shall be extended to the next following business day (provided, however, under no circumstances shall this provision be construed to extend the term of this Agreement). IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. 7 9
Company: Executive: THE SPORTS CLUB COMPANY, INC. By: /s/ D. Michael Talla /s/ John M. Gibbons --------------------------------------- ---------------------------------- D. Michael Talla John M.Gibbons Chief Executive Officer
8 EX-10.82 21 EXHIBIT 10.82 1 EXHIBIT 10.82 BALLY'S SETTLEMENT DECEMBER 31, 1998 2 SETTLEMENT AGREEMENT AND MUTUAL RELEASE THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE ("Agreement") is made as of this 31ST day of December, 1998 (the "Execution Date"), by and between The Sports Club Company, Inc. ("Sports Club") and RM Sports Club, Inc. (collectively, "Defendants"), on the one hand, and Bally Total Fitness Holding Corporation ("Bally"), on the other hand, and provides as follows: WHEREAS, there exists a certain management agreement, dated January 9, 1996 (the "Management Agreement"), between Bally and Bally Entertainment Corporation ("Bally Entertainment") relating to the Vertical Club, a health and fitness center located at 330 East 61st Street, New York, New York (the "Club"); and WHEREAS, Bally Entertainment assigned the Management Agreement to Hilton Hotels Corporation ("Hilton"), in connection with Hilton's acquisition of the Club in June 1996; and WHEREAS, Hilton purportedly assigned the Management Agreement to Sports Club on April 15, 1998, pursuant to an asset purchase agreement, dated April 1, 1998 (the "Asset Purchase Agreement"), by which Sports Club purchased substantially all of the assets of the Club from Hilton; and WHEREAS, Bally commenced an action against Defendants in the Supreme Court of the State of New York, County of New York, Index No. 602003/98, seeking declaratory relief under the Management Agreement, injunctive relief under the Management Agreement, and an award of damages for breach of the Management Agreement (the "Action"); and WHEREAS, on May 11, 1998, Justice Barry A. Cozier issued a preliminary injunction in the Action (the "Injunction"); and WHEREAS, Sports Club filed counterclaims in the Action seeking declaratory relief under the Management Agreement, an award of damages for breach of the Management Agreement and an accounting; and 3 WHEREAS, Bally asserted that Defendants owe Bally certain sums in connection with the operation of the Club; and WHEREAS, Defendants and Bally intend by this Agreement to settle and resolve any and all disputes between them relating to the Management Agreement, the Club or any of the facts referred to in the pleadings filed in the Action (collectively, the "Disputes"); NOW, THEREFORE, in consideration of the mutual promises set forth in this Agreement and the rights and obligations created herein, the sufficiency of which are hereby acknowledged, and in settlement of the Disputes, the parties hereto agree as follows: 1. Payment. Simultaneously herewith, Sports Club shall pay to Bally the sum of $ 1,379,727.00 by wire transfer pursuant to the wire instructions delivered to Sports Club simultaneously herewith. Additionally, simultaneously herewith, Sports Club shall pay to Jaffe and Asher the sum of $5,000 by wire transfer pursuant to the wire instructions delivered to Sports Club simultaneously herewith, in full satisfaction of any claims of Jaffe and Asher or Bally against Defendants for legal services rendered in connection with the "Scores" or "TCS" matters. 2. Termination of the Management Agreement. Except for the indemnification provision of paragraph 12 of the Management Agreement (to wit: the second two full paragraphs only of paragraph 12) which shall remain in full force and effect and shall survive the execution of this Agreement, the Management Agreement is hereby terminated as of the Execution Date and is of no further force or effect. Sports Club agrees to be responsible to Bally for the obligations of Owner (as such term is defined in the Management Agreement) under paragraph 12 of the Management Agreement. Notwithstanding the foregoing, Sports Club 2 4 shall have no responsibility under paragraph 12 of the Management Agreement to indemnify Bally in connection with any claim of a Bally Member (as such term is defined in paragraph 4 below) that the Sports Club breached that Bally Member's Reciprocal Rights (as such term is defined in paragraph 4 below). 3. Vertical Club Name. Bally (which, for the purposes of this paragraph 3 only, will include Bally, its affiliates, subsidiaries and other entities owned or controlled by Bally) will permit Sports Club to continue using, on a non-exclusive basis, the name "Vertical Club" solely in connection with the Club until the first to occur of: (i) Sports Club's commencement of substantial renovation or refurbishing of the Club; (ii) the closing of the Club by Sports Club for renovation, refurbishing or any other purpose; or (iii) June 1, 1999. Bally makes no representation or warranty to Sports Club of any kind or nature concerning the name Vertical Club or concerning the right of Sports Club vis a vis any third parties to use such name. Specifically, without limiting the generality of the foregoing, Bally makes no representation of warranty (i) that it has any proprietary or other interest in the name Vertical Club; (ii) that Bally or any third party is limited in any way in the use of the name Vertical Club, or (iii) that Sports Club is free to use the name Vertical Club. Accordingly, Sports Club acknowledges and agrees that it shall have no claim against Bally in the event that Sports Club is prevented from using the Vertical Club name or is the subject of legal action concerning its future use of same. 4. Cessation of Reciprocity Rights. Pursuant to paragraph 5 of the Management Agreement and prior practice between Bally and Sports Club (or their predecessors in interest), members of health and fitness centers managed by Bally (for the purposes of this 3 5 paragraph 4, "Bally Members") have been granted rights of access to use the Club pursuant to certain reciprocal membership programs, and members of the Club (for the purposes of this paragraph 4, "Club Members") have been granted rights of access to use health and fitness centers managed by Bally pursuant to certain reciprocal membership programs (such rights of access are referred to herein as "Reciprocal Rights"). Commencing with the Execution Date , all Reciprocal Rights shall cease. Accordingly, Bally shall not be obligated to honor any Reciprocal Rights claimed by Club Members, and Sports Club shall not be obligated to honor any Reciprocal Rights claimed by Bally Members. However, (a) Bally agrees to indemnify, defend and hold Sports Club Releasees, as that term is defined in paragraph 19 of this Agreement, harmless from any claims, causes of action, controversies, disputes, liabilities, costs and expenses of whatsoever nature (including reasonable legal fees), whether in law or equity, incurred by or asserted against any Sports Club Releasees by any Bally Members due to Sports Club's cessation of such Bally Members' Reciprocal Rights; and (b) Sports Club agrees to indemnify, defend and hold Bally Releasees, as that term is defined in paragraph 20 of this Agreement, harmless from any claims, causes of action, controversies, disputes, liabilities, costs and expenses of whatsoever nature (including reasonable legal fees), whether in law or equity, incurred by or asserted against Bally Releasees by any Club Members due to Bally's cessation of such Club Members' Reciprocal Rights. 5. Accounts Payable. Within four (4) business days following the Execution Date, Bally shall deliver to Sports Club for payment by Sports Club all unpaid invoices relating to the Club ("Unpaid Invoices") which were in the possession of Bally as of the Execution Date. 4 6 If Bally receives or comes into possession of any additional Unpaid Invoices following the Execution Date, it shall use reasonable efforts to deliver same to Sports Club within 15 days for payment by Sports Club. As of the Execution Date, Bally shall not pay and shall not be responsible to pay, any of the Unpaid Invoices or any other disbursements of the Club of any kind or nature. 6. Employees. Annexed hereto as Exhibit A is a list of all employees working at the Club for whom Bally has performed payroll functions (the "Club Employees"). Sports Club acknowledges and agrees that the Club Employees have during the course of their employment at the Club always been employees of the Owner of the Club (as such term is defined in the Management Agreement) and have never been employees of Bally. Bally will continue to provide all payroll functions for Club Employees through the Execution Date, including issuance of W-2s through the Execution Date. Commencing with the Execution Date, Bally shall no longer be responsible for and shall cease all payroll functions with respect to the Club Employees, and Sports Club shall be solely responsible for all payroll functions with respect to all Club Employees from the Execution Date, forward, including issuance of W-2s for the period following the Execution Date. In the event that Sports Club terminates the employment of any Club Employee on or after the Execution Date, Sports Club shall (i) be solely responsible for complying with all federal, state and local laws, rules and regulations relating to terminated employees generally, including but not limited to, the requirements of COBRA and (ii) indemnify and hold harmless Bally from any and all claims, causes of action, 5 7 controversies, disputes, liabilities, costs and expenses of whatsoever nature, including reasonable legal fees, whether in law or in equity, incurred by or asserted against Bally, arising out of the Club Employees' employment prior to the Execution Date and arising out of the termination of such employment on or after the Execution Date, for including but not limited to, unemployment compensation, severance, discrimination, wrongful termination or otherwise. Bally represents that as of the Execution Date it is unaware of any claims that would be subject to the indemnification provisions of this paragraph 6. Notwithstanding the foregoing, if any of the claims which are subject to the indemnification provisions of this paragraph 6 are covered by a policy(ies) of insurance which provide(s) for a legal defense of such claim, Bally shall accept such defense, if any, as provided by the insurance company. However, Sports Club shall be liable for any liability, cost or expense indemnified under this paragraph 6 to the extent that any applicable insurance coverage is insufficient to pay such liability, cost or expense or to the extent that insurance coverage or legal defense is denied or limited in any way, or for any reason. 7. Records and Documents. As of the Execution Date, except as otherwise indicated below, the Defendants hereby acknowledge that they are satisfied with Bally's prior delivery of documents and there shall be no further obligation of Bally with respect to further document production: (1) a copy of all membership agreements for the Club sold from April 15 , 1998 through the Execution Date which will be delivered to the Sports Club by January 31, 1999; 6 8 (2) Within four (4) business days following the Execution Date, Bally will provide Sports Club with the membership information relating to Club Members existing on the Execution Date as contained in Bally's computer database in computer readable format reasonably consistent with that as previously supplied on an earlier occasion by Bally to Sports Club; (3) a copy of the monthly operating statements for the Club relating solely to the services provided by Bally in December 1998 for the period from December 1, 1998 through December 31, 1998 which will be delivered to the Sports Club by January 31, 1999; and (4) a copy of the monthly balance sheet for the Club relating solely to the services provided by Bally in December 1998 as of December 31, 1998 which will be delivered to the Sports Club by January 31, 1999. 8. Future Membership Receipts. On or before February 1, 1999, Sports Club will advise all Club Members to forward all future membership fee payments to Sports Club. 7 9 For the period commencing with the Execution Date, any monies received by Bally (notwithstanding the notice given pursuant to the foregoing sentence) from any source including, but not limited to, direct payment from Club Members, credit card receipts or otherwise, representing membership fee payments for Club Members ("Future Receipts"), shall be deposited in a reserve account established pursuant to paragraph 9 below and disbursed in accordance with the terms of said paragraph 9. However, Bally shall have no obligation or responsibility to solicit payments from Club Members or in any way take action to collect Future Receipts other than to deposit into the reserve account such Future Receipts as they are received by Bally. 9. Reserve Account; Post-Execution Accounting. As provided above in paragraph 8, all Future Receipts received by Bally will be deposited in a Bally bank account (the "Reserve Account"), which shall not be required to be segregated from other Bally funds. On February 1, 1999, Bally shall provide to Sports Club an accounting relating solely to the services provided by Bally in December 1998 for the period from December 1, 1998 through December 31, 1998 including the Future Receipts collected in December 1998 as is agreed in paragraphs 7 (iii) and (iv) and 8 (the "Post-Execution Accounting"). The Post-Execution Accounting shall include a credit to Sports Club in the amount of $76,403.82 representing November and December 1998 rent from Scores Entertainment, Inc. which was heretofore delivered to Jaffe and Asher, as attorneys for Bally. The Post-Execution Accounting shall set forth the amount due to be paid by Sports Club to Bally or Bally to the Sports Club, as the case may be, relating to the 8 10 period December 1, 1998 through December 31, 1998 as determined by Bally in accordance with the provisions of the Management Agreement (the "December Payment"). On or before February 1, 1999, Bally shall pay to itself out of the Reserve Account (i) the amount of the December Payment as set forth in the Post-Execution Accounting, plus (ii) any charge-backs, "NSF" debits and other amounts representing funds previously received by Bally as membership fees for the Club which are required, for any reason, to be returned or disgorged by Bally or the Club (collectively, "Charge-backs") for the period through December 31, 1998. The Reserve Account less (a) the payment to Bally for items (i) and (ii) above; (b) the sum of $25,000 (to be continued to be held in the Reserve Account pursuant to paragraph 10 below to secure future payments of the Charge-backs and Fees [as hereinafter defined]); and (c) Future Receipts collected during the month of January 1999 shall be remitted to Sports Club within ten (10) days after the Post-Execution Accounting. In the event that there are insufficient funds in the Reserve Account to (a) make the payment to Bally for items (i) and (ii) above; (b) to maintain the Reserve Account balance at $25,000.00 pursuant to paragraph 10 below and (c) to continue to hold the Future Receipts collected during the month of January 1999, Sports Club shall deliver to Bally, within ten (10) days after the Post-Execution Accounting, the amount of such deficiency, to be deposited in the Reserve Account and disbursed in accordance with this Agreement. 10. Post December 31, 1999 Receipts and Charge-Backs and Accountings. Pursuant to paragraph 9 above, the balance in the Reserve Account after January 31, 1999 will be $25,000.00 plus the Future Receipts collected during the month of January 1999. Any Future 9 11 Receipts collected after January 31, 1999 shall be deposited in the Reserve Account as well. Bally will be entitled to a fee equal to 15% of the gross amount of any Future Receipts (the "Fee") deposited from January 1, 1999 for so long as Bally continues to receive any Future Receipts. On March 1, 1999 and each first day of each consecutive month thereafter Bally shall be entitled to pay itself out of the Reserve Account (a) its Fee for the Future Receipts received by Bally two (2) months prior thereto (e.g., on March 1, 1999, Bally will pay itself the Fee for the Future Receipts collected during January 1999) and (b) all Charge-backs not previously taken. If, on the first day of any such month, the Reserve Account after the payment of (a) and (b) hereof is more than $25,000 plus the Future Receipts of the prior month, Bally shall remit to the Sports Club, within ten (10) days of the first day of each month, the amount of such excess. If, on the first day of any such month, the balance in the Reserve Account after the payment of (a) and (b) hereof is less than $25,000, plus the Future Receipts of the prior month, Sports Club shall remit to Bally, within ten (10) days after demand, the amount of such deficiency, which upon receipt by Bally will be deposited in the Reserve Account. Five (5) months after the closing of the Club by Sports Club, Bally shall deduct from the Reserve Account any then remaining Fees and Charge-backs, and the balance of the Reserve Account shall within ten (10) days be remitted by Bally to Sports Club. Nonetheless, the Sports Club shall have a continuing obligation to reimburse Bally within ten (10) days of demand by Bally for any past or present Charge-backs and Fees not previously taken. 10 12 11. Arbitration. Any claim or dispute between the parties arising out of the provisions of paragraphs 8, 9 and 10 of this Agreement shall be determined by arbitration in New York, New York in accordance with the Commercial Arbitration Rules of the American Arbitration Association before a single arbitrator. The losing party in the arbitration proceeding as determined by the arbitrator shall be responsible to pay the costs and expenses, including reasonable legal fees, of the prevailing party, in an amount determined by the arbitrator. The decision or award of the arbitrator shall be final and binding upon the parties. Any arbitral award may be confirmed and/or entered as a judgment or credit in any court of competent jurisdiction in New York, New York. 12. Indemnification Against Hilton Claims. In the event that Hilton (or any assignee or successor of Hilton) asserts any claim, action, cause of action, controversy or dispute under the Management Agreement against Bally ("Hilton Claim"), Sports Club shall (i) provide a defense to any such Hilton Claim, by retaining experienced, reputable counsel satisfactory to Bally to defend against such Hilton Claim, at the sole expense of Sports Club; and (ii) shall indemnify Bally and hold Bally harmless from and against (a) any expense which Bally may reasonably incur arising out of or relating to such Hilton Claim or the defense thereof and (b) any judgment entered against Bally arising out of such Hilton Claim. Before retaining counsel with respect to any Hilton Claim, Sports Club shall notify Bally in writing of its choice of counsel and Bally shall have five (5) business days to object in writing to such choice. If Bally objects to such choice of counsel, the parties shall attempt to agree on counsel mutually satisfactory to them, and if no agreement is reached within three (3) business days, counsel shall be the New 11 13 York City law firm of Rogers & Wells (or if Rogers & Wells at that time has a conflict), another law firm of similar size and reputation. Notwithstanding the foregoing, Bally shall have the right, but not the obligation, to retain separate counsel to participate in the defense of any such Hilton Claim, at the expense of Bally. 13. Computer System and Personal Property. Bally shall not remove the computer hardware and software systems except for the AS400 and related hardware and software (the "Computer System") presently at the Club. Bally acknowledges that these computer hardware and software systems (except for the AS400 and related hardware and software) are the exclusive property of Sports Club. Bally represents, warrants and acknowledges that it does not claim any interest, of whatsoever nature, in any of the furniture, fixtures, equipment, machinery or other personal property (except for the "credit card terminal and printer" which may be removed by Bally prior to the Execution Date) at the Club (collectively "Personal Property"). Defendants acknowledge at the time of the execution of this Agreement that they have inspected the Computer System and Personal Property at the Club and same are in the premises of the Club and accepted "as is." Notwithstanding the foregoing, Bally shall not remove the AS400 and related hardware and software from the Club until it provides to Sports Club the information required by paragraph 7(ii) hereof. Sports Club will cooperate with Bally in permitting the removal of the AS400 and related hardware and software. 14. No Further Authority as Manager. As of the Execution Date, Bally will not act as manager of the Club or represent itself to any third party as being the future manager of the Club. 12 14 15. Non-disclosure. Bally and Defendants shall each keep the terms and conditions of this Agreement and the Management Agreement confidential and not disclose same to any third parties (except that the parties may disclose the terms and conditions of this Agreement and the Management Agreement to their attorneys and accountants who shall be advised of the terms of this Non-disclosure provision), unless such disclosure is required by applicable law, judicial process or order of a court of competent jurisdiction. 16. Discontinuance. Concurrently with the execution of this Agreement, (a) Bally and Defendants shall have their counsel of record in the Action execute and file a Stipulation of Discontinuance in the form of Exhibit B hereto, dismissing with prejudice all claims filed by Bally in that action and all counterclaims against Bally filed by Sports Club in that action, (b) Bally and Defendants shall execute and file a Stipulation and Order vacating the Injunction and Bally agrees to have its counsel take any and all additional steps necessary to vacate the Injunction, and (c) the Appeal of the Action shall be withdrawn with prejudice. 17. Third Party Rights. Nothing contained herein shall be deemed a waiver, limitation or release of any right of any party to this Agreement as against Hilton or any other third party. 18. Severability. If any provision of this Agreement shall for any reason be determined to be unenforceable in any respect, such unenforceability shall not affect any other provision set forth herein, and this Agreement shall be construed as if such unenforceable provision had not been contained herein. 13 15 19. Release by Bally. Except for the terms and conditions of this Agreement, Bally for itself, its successors and assigns, and the officers, directors, trustees, agents, representatives, shareholders, bondholders, attorneys and employees of Bally and of any company, partnership or other legal entity which is or has been owned by Bally in whole or in part, along with all affiliates, subsidiaries, predecessors, officers, directors, employees, or shareholders thereof, and all persons claiming by, through or under any of the foregoing (collectively, "Bally Releasors"), hereby release and discharge Defendants, their current and former related entities, their current and former affiliates and subsidiaries, their predecessors, successors and assigns, and the current and former officers, directors, trustees, agents, representatives, shareholders, partners, bondholders, attorneys, insurers and employees thereof (collectively, "Sports Club Releasees"), from all actions, claims, counterclaims, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, detriments, executions, claims, and demands whatsoever, in law or equity, known or unknown, which the Bally Releasors ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Agreement but arising solely out of or in connection with the Disputes. 20. Release by Defendants. Except for the terms and conditions of this Agreement, Defendants for themselves, their successors and assigns, and the officers, directors, trustees, agents, representatives, shareholders, bondholders, attorneys and employees of Defendants and of any company, partnership or other legal entity which is or has been owned by 14 16 Defendants in whole or in part, along with all affiliates, subsidiaries, predecessors, officers, directors, employees, or shareholders thereof, and all persons claiming by, through or under any of the foregoing (collectively, "Sports Club Releasors"), hereby release and discharge Bally, its current and former related entities, its current and former affiliates and subsidiaries, its predecessors, successors and assigns, and the current and former officers, directors, trustees, agents, representatives, shareholders, partners, bondholders, attorneys, insurers and employees thereof (collectively, "Bally Releasees"), from all actions, claims, counterclaims, causes of action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills, covenants, contracts, controversies, agreements, promises, damages, detriments, executions, claims, and demands whatsoever, in law or equity, known or unknown, which the Sports Club Releasors ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matter, cause or thing whatsoever from the beginning of the world to the date of this Agreement but arising solely out of or in connection with the Disputes. 21. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 22. Jurisdiction. Except for those claims required to be arbitrated pursuant to paragraph 11 hereof, the parties consent to the jurisdiction of the courts of the State of New York with respect to any claim, cause of action, controversy or dispute arising out of or relating to this Agreement, the Management Agreement or the Club. 23. Review by Counsel. The parties represent and warrant that (a) their review and execution of this Agreement has been in consultation with their attorneys, and that they 15 17 understand their rights, obligations and undertakings under this Agreement; (b) they are entering into this Agreement knowingly and voluntarily, and (c) they hereby waive any and all defenses to enforcement of this Agreement based on an alleged lack of such knowledge or free will. 24. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matters hereof, and is based solely on the representations and warranties, covenants and agreements contained herein, and not on the basis of any other representation, warranty, covenant, agreement, promise, statement, arrangement or understanding, written or oral, not expressly set forth herein. This Agreement may not be amended or modified except in writing signed by all the parties and expressly stating that it is intended to amend this Agreement. 25. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 26. Notices. Any notice sent under this Agreement shall be sent simultaneously be facsimile and by overnight courier (and shall be effective when so sent) as follows: If to Bally: Cary A. Gaan, Esq. Bally Total Fitness Holding Corp. 8700 W. Bryn Mawr Avenue Chicago, Illinois 60631 773/399-0126 (facsimile) with a copy to: Sanford S. Asher, Esq. Jaffe & Asher 52 Vanderbilt Avenue New York, New York 10017 (212) 687-9639 (facsimile) 16 18 If to Sports Club: The Sports Club Company, Inc. 11100 Santa Monica Blvd. Suite 300 West Los Angeles, CA 90025 (310) 479-4350 (facsimile) with a copy to: Robert Ward, Esq. Mayer Brown & Platt 1675 Broadway New York, NY 10019 (212) 262-1910 (facsimile) 27. Power and Authority. The persons signing this Agreement represent and warrant that they each have the power and authority to execute and deliver this Agreement as the binding obligation of the parties for whom they are signing. 28. Facsimile Binding. The execution of this Agreement and the transmission thereof by facsimile shall be binding on the party signing and transmitting same by facsimile fully and to the same extent as if a counterpart of this Agreement bearing such party's original signature had been delivered. Without limiting the binding nature of counterparts of this Agreement transmitted by facsimile, each party who so transmits his signature by facsimile, shall deliver an additional counterpart bearing his original signature, within seven (7) days thereafter. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. THE SPORTS CLUB COMPANY, INC. By: /s/ D. Michael Talla --------------------------------- Name: D. Michael Talla Title: CEO RM SPORTS CLUB, INC. By: /s/ D. Michael Talla --------------------------------- Name: D. Michael Talla Title: CEO 17 19 BALLY TOTAL FITNESS HOLDING CORPORATION By: /s/ William G. Farelli --------------------------------- Name: William G. Farelli Title: EVP 18 20 Bally Wire Instructions for $1,379,727 wire: LaSalle National Bank ABA Number: 071000505 For the Account of: Bally Total Fitness Corporation Account No. 5800020108 EX-10.83 22 EXHIBIT 10.83 1 EXHIBIT 10.83 10/27/98 LETTER AGREEMENT 2 THE SPORTS CLUB COMPANY, INC. 11100 SANTA MONICA BOULEVARD, SUITE 300 Los Angeles, California 90025 October 27, 1998 Millennium Partners LLC 1995 Broadway, 3rd Floor New York, New York 10023-5882 Re: Option on Future Clubs Gentlemen: Concurrently with the execution of this letter agreement, an affiliate of yours and an affiliate of ours are entering into a lease for a health club in a large mixed use project in San Francisco (the "SF Project"). You plan, either yourself or through an affiliate, to develop a number of future large mixed use projects in major metropolitan areas, including Washington, DC, Boston, Miami, Toronto and Atlanta (such five cities, initially, the "Cities"). As part of the consideration for the San Francisco health club lease, you, Millennium Partners LLC ("Millennium"), hereby grant to us, The Sports Club Company, Inc. ("SCC"), the following option. 1. If Millennium or an affiliate of Millennium proceeds with any large mixed use project in any of the Cities (it being understood that any SCC option to lease as described in this letter agreement shall apply to only one (1) project per City) and if each of the following conditions precedent are then satisfied: (i) neither SCC nor any affiliate of SCC then remains in monetary default or in material default under any lease or other material written agreement (including, without limitation that certain participation agreement between Millennium and SCC dated as of the date hereof) with Millennium or any affiliate of Millennium after expiration of any applicable notice and cure period without such default having been cured, (ii) SCC or an affiliate of SCC is then operating at least one first class health club, (iii) SCC is not then in bankruptcy, 3 (iv) SCC then has a net worth of not less than $30 million, as supported by documentation reasonably acceptable to Millennium, and (v) Millennium or its affiliate is going to have a health club of at least 50,000 square feet in such project, then SCC shall have the option to elect to have an affiliate of SCC enter into a lease for a health club in such project on substantially the same terms and conditions (i.e., the same lease, work letter, guaranty and participation agreement) (collectively, "Project Documents") as apply to the health club lease in the San Francisco Project, except for the following: A. Subject to any adjustment required pursuant to clauses B, D and E below, the annual rent for any health club in Miami, Toronto or Atlanta or any other City pursuant to paragraph 2 below shall be $2.5 million rather than $3 million; it being understood that, notwithstanding anything to the contrary contained in this letter agreement, the annual rent for any health club in Washington, D.C. or Boston shall be $3 million and shall not be subject to any such adjustment. B. Except for the Washington, D.C. and Boston clubs whose size has been communicated to SCC, if any health club as to which SCC exercises its option contains less than 100,000 rentable square feet as mutually determined by SCC and Millennium prior to the execution of the Project Documents with respect thereto (except to a de minimis degree, the parties hereby agreeing that a difference from 100,000 rentable square feet of up to 2,000 rentable square feet shall be de minimis and that any such difference in excess of 2,000 rentable square feet shall not be de minimis) (a "Typical Health Club"), then the amount of annual rent and tenant improvement allowance for such health club shall be equitably adjusted to reflect such lesser square footage. C. The applicable landlord shall use reasonable efforts to reasonably accommodate the applicable tenant's reasonable parking needs for the health club in question upon commercially reasonable terms, it being understood that the foregoing shall not be deemed a representation that such reasonable efforts of the applicable landlord shall satisfy the parking needs of the applicable tenant. D. Except for the initial Washington, D.C. and Boston leases, if any lease is to be entered into pursuant to this letter agreement after the third anniversary of the execution of the San Francisco lease, then a percentage of the annual rent under such lease (after being adjusted pursuant to clause B above if and to the extent applicable) shall be further adjusted prior to the execution thereof, from what it would otherwise have been absent such further adjustment, by the percentage change in the applicable index of construction costs for such City from what such index was on the date of execution of the San Francisco lease to what such index was on the date of execution of such lease. The percentage of the annual rent so adjusted shall be the percentage equivalent of the fraction whose numerator is the "hard" 4 construction costs for such health club and whose denominator is all costs (including, without limitation, "hard" construction costs, "soft" construction costs, financing costs and land costs) for such health club. Such fraction, and the components thereof, shall be certified to SCC by the chief financial officer of Millennium, subject to SCC's right to review the components, and backup documentation, for the same. E. If (i) SCC were to enter into five leases for health clubs pursuant to its option before the third anniversary of the execution of the San Francisco lease and (ii) all five of such health clubs were either Typical Health Clubs or leases in Washington, D.C. or Boston for health clubs whose size is consistent with what was communicated to SCC and accepted by SCC as of the date hereof (an "Approved Health Club"), then it is the intention of the parties that the aggregate average rent pursuant to all five of such leases plus the San Francisco lease would be $2.75 million. The parties further recognize that such average annual rent may not be arrived at, from time to time, if the stated annual rent, before any adjustment pursuant to clauses B or D, for each health club in a City other than Washington, D.C. or Boston was fixed at $2.5 million, pursuant to clause A. Accordingly, the parties hereby agree that, before any adjustment pursuant to clauses B or D is made to the annual rent under any lease for a health club for any City other than Washington, D.C. or Boston, the annual rent under such lease shall first be adjusted so that the average annual rent under such lease, any other leases then already entered into pursuant to SCC's option and the San Francisco Lease shall be $2.75 million. Once any such adjustment has been made, then the stated annual rent under such lease shall further be adjusted, if and as may be required, first pursuant to clause B and then pursuant to clause D. All such adjustments, if any, to such a lease shall be made prior to execution of such lease. While the layout of any health club in any particular City will vary, the level of landlord work will be substantially the same as in the San Francisco health club, subject to equitable adjustment as aforesaid if the health club in question is not a Typical Health Club. 2. SCC recognizes that neither Millennium nor any affiliate of Millennium is under any obligation to actually proceed with any large mixed use project in any of the Cities, whether or not SCC exercises its option or fails to exercise its option with respect to any project in any City. (Millennium shall keep SCC reasonably apprised of the status and progress of any project as to which SCC has exercised its option and shall promptly notify SCC if and when Millennium may decide not to proceed with such project.) If Millennium or an affiliate of Millennium, in its sole discretion, shall elect not to proceed with such a project in Washington, DC or in Boston, then SCC shall continue to have the option set forth in this letter agreement for each of the remaining Cities but no other cities. If, however, Millennium or an affiliate of Millennium, in its sole discretion, shall not have given SCC the notice referenced in paragraph 3 of its intention to develop such a project in any one or more of Miami, Toronto or Atlanta by October 1, 2000, then the definition of the "Cities" shall be expanded, on a one-for-one basis, to 5 include any additional major metropolitan cities in which Millennium or an affiliate of Millennium may proceed with such a project. (Thus, if Millennium or an affiliate of Millennium elects not to proceed with any one of Miami, Toronto or Atlanta, then the next city in which Millennium or an affiliate of Millennium shall proceed that would not otherwise have been a City shall be a City; if Millennium or an affiliate of Millennium elects not to proceed with any two of Miami, Toronto or Atlanta, then the next two additional cities in which Millennium or an affiliate of Millennium shall proceed that would not otherwise have been Cities shall be Cities; and if Millennium or an affiliate of Millennium does not proceed with all three of Miami, Toronto and Atlanta, then the next three additional cities in which Millennium or an affiliate of Millennium shall proceed that would not otherwise have been Cities shall be Cities.) The definition of "Cities" shall further be expanded to include any such additional major metropolitan cities if and to the extent necessary, pursuant to paragraph 5, to give SCC an option on up to a total of 5 projects. 3. SCC shall exercise its option with respect each City, if at all and in its sole discretion, as follows. Millennium shall give written notice to SCC, in accordance with the notice provisions of the San Francisco lease, of its intention to develop a large mixed use project in a City as soon as reasonably possible following Millennium's good faith determination to proceed with such project. Such notice shall include the location of such project, Millennium's then intent regarding the tenant mix and design of such project, Millennium's estimated ground breaking date for such project and the approximate size of the health club Millennium then intends to have in such project. SCC shall exercise its option with respect to such project, if at all and in its sole discretion, by giving written notice to Millennium, again in accordance with the notice provisions of the San Francisco lease, not later than the business day first occurring at least 30 days after the date of SCC's actual receipt of Millennium's notice (time being of the essence in this regard). Millennium shall use its good faith efforts to keep SCC generally apprised of the status of its efforts to develop any large mixed use project in any City, or potential City, prior to Millennium's actually giving any such notice to SCC. From and after Millennium's giving any such notice to SCC and until the expiration of the period of time in which SCC has to respond to such notice, Millennium shall cooperate with SCC's reasonable requests for information regarding the subject project. Subject to paragraph 5, SCC's failure timely to respond to any such notice from Millennium shall conclusively be deemed SCC's election not to enter into a lease for a health club in such project. Millennium and SCC shall use their respective good faith efforts diligently to finalize and execute Project Documents for any project as to which SCC has timely exercised its option, as aforesaid. 4. Subject to paragraph 5, if SCC (i) fails timely to exercise its option with respect to any particular project, as aforesaid, or (ii) fails, after having timely exercised any such option, to use its good faith efforts to finalize and execute, or have its applicable affiliate finalize and execute, the Project Documents with respect to such project, then, in each such event, SCC shall be deemed to have waived and relinquished its right to lease space at the applicable project, 6 and Millennium shall at any and all times thereafter be entitled to lease all or any portion of such space to others at such rental and upon such terms as Millennium, at its sole discretion, may desire. Notwithstanding the foregoing, however, if Millennium, within 5 years after SCC is deemed to have waived its original option with respect thereto pursuant to this paragraph 4, other than pursuant to clause (ii) of this paragraph 4, either shall have an offer to lease or shall propose to lease, without yet having any actual offer to lease, any of such space for a health club upon economic terms and conditions (for example and without limitation, rental, term, free rent, construction allowance and escalations) which are less than 95% on an aggregate basis of those terms and conditions under the applicable Project Documents, then subject to the provisions in clauses (i) through (v) of paragraph 1 of this letter agreement (a) SCC's option for such project shall be reinstated on the new economic terms and conditions and (b) Millennium shall be required promptly to issue a new notice (including such new economic terms and conditions) to SCC for such project except that SCC's time within which to elect to exercise its option with respect to such project shall be 15 business days, rather than 30 business days. If SCC is deemed to have waived such reinstated option, other than pursuant to clause (ii) of this paragraph 4, then Millennium shall have a period of 180 days from the date of such deemed waiver to lease such space on such terms and conditions (or terms and conditions less advantageous to the proposed tenant) that SCC is deemed to have waived. SCC's option shall, however, again be reinstated, subject to the provisions of this paragraph 4 and in clauses (i) through (v) of paragraph 1 hereof, either after such 180 day period if no lease has yet been entered into for such space or if Millennium proposes during such 180 day period to lease such space on terms and conditions more advantageous to the tenant than those that SCC declined; provided, however, that such 180 day period shall be extended for up to an additional consecutive 90 days if and for so long as Millennium shall be actively engaged in good faith negotiations with a potential tenant at the expiration of such 180 day period and shall thereafter continue to engage in such good faith negotiations with such potential tenant. Once Millennium has entered into a permitted lease for such space, however, SCC shall have no further option regarding the same; it being agreed that Millennium shall provide SCC with a copy of any such lease promptly following execution of any such lease. 6. The parties intend for SCC's option set forth in this letter agreement to apply to up to a total of 5 projects, one such project in each of a total of up to 5 major metropolitan cities; provided, however, that if (i) Millennium's notice regarding any project references Millennium's intent to have a health club in such project that shall be smaller than a Typical Health Club or an Approved Health Club with respect to a health club located in Washington, D.C. or Boston, as applicable, and (ii) SCC elects, in its sole discretion, not to exercise its option as to such project, then such project shall not count toward the up to 5 projects that are to be the subject of SCC's option. Alternatively, if SCC elects, in its sole discretion, to exercise its option as to any project having a health club smaller than the health club in the San Francisco Project, then such project shall count towards the up to 5 projects that are to be the subject of SCC's option. If SCC elects, in its sole discretion, to exercise its option as to any project and if 7 Millennium nonetheless determines, in its sole discretion, not to proceed with such project, then such project shall not count towards the up to 5 projects that are to be the subject of SCC's option. In no event, however, shall SCC have the right to lease space pursuant to its option (a) in more than 5 major metropolitan cities, in the aggregate, (b) in Chicago, Los Angeles or New York City and (c) in any project, other than in the initial Cities or in any subsequent City required to be offered to SCC pursuant to this letter agreement, on which Millennium has commenced construction prior to October 1, 2000. 6. Although SCC's option set forth in this letter agreement does not apply to any project in Chicago, Los Angeles or New York City, Millennium and SCC nonetheless desire for SCC to have a right of first offer with respect to any health club of at least 50,000 square feet that Millennium shall propose to have in any such project. The terms and conditions for such right of first offer shall be identical, in all respects, to the terms and conditions for SCC's option set forth above, as if such Chicago, Los Angeles and New York were Cities, except as otherwise set forth in this paragraph 6. Millennium's notice to SCC regarding any project in Chicago, Los Angeles and New York City shall include, in addition to those matters referenced in paragraph 3 hereof, what Millennium believes to be the fair market rent for such health club. If SCC fails to exercise its right of first offer with respect to such project or fails to finalize and execute Project Documents for such project as provided herein, then SCC shall be deemed to have waived its right of first offer with respect to such project, and Millennium shall at any and all times thereafter be entitled to lease all or any portion of such space to others at such rental and upon such terms as Millennium, at its sole discretion, may desire but subject to the provisions of paragraph 4. For these purposes, paragraph 4 shall be interpreted without reference to paragraph 5, and Millennium shall be required to re-offer such space to SCC if Millennium proposes to lease, whether or not Millennium yet has any actual offer to lease, any of such space for a health club upon new economic terms and conditions which are less than 100% on an aggregate basis of those terms and conditions that SCC shall be deemed to have waived. The calculation of whether such new terms and conditions are less than such 100% threshold shall be made on the basis of the net economic effect to Millennium of the terms and conditions SCC waived as compared to the new terms and conditions after taking into account any brokerage commission payable by Millennium for a third party lease on such new terms and conditions as compared to no brokerage commission being payable by Millennium in connection with a lease to SCC or its affiliate on the terms and conditions that were waived by SCC. Whether or not SCC exercises its option as to any City shall have no effect on its right of first offer as to Chicago, Los Angeles and New York City, and whether or not SCC exercises its right of first offer as to Chicago, Los Angeles or New York City shall have no effect on its option as to the Cities. 7. This letter agreement shall expire on the earlier to occur of (i) five leases (other than the San Francisco lease) having been signed pursuant hereto, (ii) the fifth anniversary of the date of execution of the lease for the San Francisco health club, (iii) any lease with Millennium or an affiliate of Millennium for a health club either in a City or in San Francisco no 8 longer being in full force and effect as a result of a default thereunder by SCC or an affiliate of SCC not having been cured after the expiration of any applicable notice and cure period or (iv) SCC or an affiliate of SCC no longer operating at least one first class health club. 8. The option and right of first offer set forth herein are personal to SCC and may only be assigned or transferred by SCC to an affiliate of SCC. Sincerely, THE SPORTS CLUB COMPANY, INC., a Delaware corporation By: /s/ John Gibbons ----------------------------------- Its: President Acknowledge 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/ Philip Lovett -------------------------------- Its: -------------------------------- EX-10.84 23 EXHIBIT 10.84 1 EXHIBIT 10.84 PARTICIPATION AGREEMENT OCTOBER 27, 1998 2 =============================================================================== PARTICIPATION AGREEMENT BETWEEN MILLENNIUM PARTNERS LLC, AND THE SPORTS CLUB COMPANY. DATED AS OF OCTOBER 27, 1998 =============================================================================== 3 PARTICIPATION AGREEMENT (this "AGREEMENT") made as of the _____ day of October 1998, between MILLENNIUM PARTNERS LLC, a New York limited liability company, having an office c/o Millennium Partners, 1995 Broadway, 3rd Floor, New York, New York 10023 ("MILLENNIUM") and THE SPORTS CLUB COMPANY, a Delaware corporation, having an office at 11100 Santa Monica Boulevard, Suite 300, Los Angeles, California 90025 ("SCC"). WITNESSETH: WHEREAS, Millennium and SCC have entered into that certain Option on Future Clubs agreement dated as of the date hereof (the "OPTION AGREEMENT") whereby SCC has the option to elect to have a related entity of SCC enter into a lease for an Athletic Club in up to five (5) Projects (as such terms are hereinafter defined); WHEREAS, Millennium has or will have, directly and indirectly, a majority of the interests of certain entities (each a "MILLENNIUM ENTITY" and collectively, the "MILLENNIUM ENTITIES") which hold or which will hold both fee and leasehold title to certain real property located in San Francisco, California, Boston, Massachusetts, Washington, D.C., Atlanta, Georgia, Miami, Florida and Toronto, Canada, and other locations upon each of which Millennium intends to cause the construction of a mixed-use development (for purposes of this Agreement each such real property exclusive of real property located in New York, New York, Chicago, Illinois and Los Angeles, California is hereinafter referred to as a "PROJECT" and collectively, the "Projects"); WHEREAS, Millennium intends to have a first-class coed athletic club (with respect to each Project, an "ATHLETIC CLUB" and with respect to the Projects, collectively the "ATHLETIC CLUBS") operated by an operator with first-class expertise, reputation and experience in each Project; WHEREAS, Millennium desires to cause a Millennium Entity to demise and let to a related entity of SCC subject to and in accordance with the Option Agreement (with respect to each Project, an "SCC ENTITY" and with respect to the Projects, collectively the "SCC ENTITIES") and SCC desires to cause a related entity of SCC to lease from Millennium Entity subject to and in accordance with the Option Agreement and an agreement of lease (with respect to a Project, an "AGREEMENT OF LEASE" and with respect to the Projects, collectively the "AGREEMENTS OF LEASE") certain space (individually and collectively the "LEASED PREMISES") in a Project for the operation of an Athletic Club; and WHEREAS, in order to induce Millennium to cause a Millennium Entity to enter into an Agreement of Lease with an SCC Entity, SCC has agreed to pay, or cause to be paid, to Millennium with respect to each Leased Premises, not to exceed six (6) in the aggregate, an amount equal to twenty percent (20%) of the Adjusted Net Distributable Cash (as hereinafter defined) derived therefrom by the applicable SCC Entity or any Affiliate (as hereinafter defined) thereof (to the extent derived by any such Affiliate from the same applicable Leased Premises (exclusive of any management fee payable on account of such Leased Premises)) or any successor or assign of such SCC Entity or Affiliate. NOW, THEREFORE, in consideration of the mutual promises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 4 ARTICLE 1 EFFECTIVE DATE OF AGREEMENT Section 1.1 This Agreement and all of the terms and conditions hereof shall be effective as of the date hereof (the "EFFECTIVE DATE") and shall end (the "EXPIRATION DATE") on the date on which the last Agreement of Lease shall expire or be canceled or terminated pursuant to any of the terms and conditions therein or pursuant to law. ARTICLE 2 DEFINITIONS Section 2.1 For purposes of this Agreement, each of the following terms shall have the meaning given such term in this Section 2.1 or in the Section of this Agreement indicated: (a) "NET DISTRIBUTABLE CASH" shall mean "EBITDA" for the applicable SCC Entity and any Affiliate (as hereinafter defined) thereof (to the extent derived by any such Affiliate from the same applicable Leased Premises (exclusive of any management fee payable on account of such Leased Premises)) and any successor or assign of such SCC Entity and/or Affiliate from a Leased Premises determined in accordance with United States generally accepted accounting principles consistently applied from period to period ("GAAP"), for the period for which Net Distributable Cash is being determined. (b) "ADJUSTED NET DISTRIBUTABLE CASH" shall mean an amount equal to the Net Distributable Cash derived by the applicable SCC Entity or any Affiliate thereof (to the extent derived by any such Affiliate from the same applicable Leased Premises (exclusive of any management fee payable by any such Affiliate to the applicable SCC Entity)) or any successor or assign of such SCC Entity or Affiliate from a Leased Premises for a Lease Year minus the sum of (i) a reasonable and customary portion of such Net Distributable Cash (including, without limitation, unearned initiation fees, prepaid dues and prepaid services) for reasonably anticipated expenditures required to maintain and operate an Athletic Club in such Leased Premises ("RESERVES") plus (ii) the Management Fee with respect to such Leased Premises for such Lease Year plus (iii) the Percentage Equity Return Payment with respect to such Leased Premises for such Lease Year plus (iv) the aggregate amount of Percentage Equity Return Payments for prior Lease Years which have not been paid to the applicable SCC Entity, together with interest thereon at the Prime Rate (as hereinafter defined) from the date payable to the applicable SCC Entity until the date paid to the applicable SCC Entity. (c) "LEASE YEAR" shall mean each successive twelve (12) month period during the term (the "TERM") of an Agreement of Lease commencing on January 1 and ending December 31 (or such other twelve (12) month period as shall be reasonably designated by the applicable Millennium Entity), provided that the first Lease Year shall begin upon the commencement date of an Agreement of Lease and end on December 31 of the calendar year in which such commencement date occurs, and the last Lease Year shall end on the last day of the term of such Agreement of Lease or the last day of the last exercised lease extension thereunder. (d) "MANAGEMENT FEE" shall mean an amount equal to six percent (6%) of Gross Cash Receipts with respect to a Leased Premises for a Lease Year. -2- 5 (e) "GROSS CASH RECEIPTS" shall mean all revenue and income of any nature derived by the applicable SCC Entity or any Affiliate thereof (to the extent derived by any such Affiliate from the same applicable Leased Premises (exclusive of any management fee payable on account of such Leased Premises)) or any successor or assign of such SCC Entity or Affiliate from a Leased Premises or from the use or operation thereof, including, without limitation, proceeds from business interruption insurance, governmental allowances and awards and other forms of payments or awards from any source whatsoever, which is properly attributable to a Lease Year, determined in accordance with GAAP. (f) "PERCENTAGE EQUITY RETURN PAYMENT" shall mean an amount equal to an eleven percent (11%) per annum cumulative, compounding return on the aggregate Outstanding Capital Investment with respect to a Leased Premises. (g) "CAPITAL INVESTMENT" shall mean the aggregate hard and soft costs and expenses actually incurred by the applicable SCC Entity in the development of a Leased Premises and in the ordinary course of business in maintaining and operating an Athletic Club in a Leased Premises from time to time during the term of an Agreement of Lease (but only to the extent such costs and expenses are not included in the calculation of Net Distributable Cash) exclusive of (i) any and all debt service not directly associated with the financing of the acquisition and/or construction of any assets of the applicable SCC Entity, including, without limitation, the work performed by the applicable SCC Entity to prepare a Leased Premises for use and occupancy (collectively, the "IMPROVEMENTS") and athletic equipment, machines, furniture and other personal property used in a Leased Premises (collectively, the "TRADE FIXTURES) and (ii) any contributions or payments made by Millennium or any Millennium Entity to a SCC Entity on account of any work or installations made in a Leased Premises (collectively, the ALLOWANCE"). (g) "OUTSTANDING CAPITAL INVESTMENT" shall mean an amount equal to the Capital Investment with respect to a Leased Premises which has not, as of such date, been recouped by SCC or the applicable SCC Entity. SCC shall, or shall cause each SCC Entity, to apply any and all Adjusted Net Distributable Cash with respect to a Leased Premises against the Capital Investment with respect thereto in accordance with customary accounting practices consistently applied. (h) "PERSON" 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. (i) "AFFILIATE" shall mean a Person which shall (i) Control (as hereinafter defined), (ii) be under the Control of, or (iii) be under common Control with the Person in question, and "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. ARTICLE 3 NDC RENT -3- 6 Section 3.1 (a) Subject to the terms and conditions of this Article 3 and provided Millennium shall not be in default of any of Millennium's monetary obligations under this Agreement after the expiration of any applicable notice, grace and/or cure periods (a "MILLENNIUM EVENT OF DEFAULT"), SCC shall pay, or shall cause to be paid, to Millennium in the manner hereinafter provided, twenty percent (20%) of the amount, calculated on an aggregate basis for all Leased Premises and calculated based on the assumption that all of the Leased Premises constitute a single business operation, equal to (i) the aggregate amount of Adjusted Net Distributable Cash for each Lease Year or partial Lease Year derived from all of the then Leased Premises minus (ii) the aggregate amount of Outstanding Capital Investment as of the day of the period for which Adjusted Net Distributable Cash was determined for such Lease Year or partial Lease Year with respect to all such Leased Premises (the "NDC RENT"); provided, however, that notwithstanding anything to the contrary contained herein, in the event of a Millennium Event of Default, SCC shall pay, or cause to be paid, to Millennium the portion of NDC Rent which exceeds the amount of the Millennium Event of Default and in the event SCC shall not pay, or shall not have caused to be paid, to Millennium all or any portion of NDC Rent as a result of a Millennium Event of Default, SCC shall pay, or cause to be paid, any such unpaid NDC Rent to Millennium promptly following the date on which any such Millennium Event of Default is cured or it has been determined in accordance with Article 5 hereof that no Millennium Event of Default exists. NDC Rent shall be payable on a quarterly basis (as estimated by SCC, or an SCC Entity, as applicable, in good faith based on SCC's, or an SCC Entity's, as applicable, books and records) contemporaneously with the delivery of a Quarterly Statement (as hereinafter defined). (b) (i) On or before the thirtieth (30th) day following the expiration of each quarterly period during the term of each Agreement of Lease, SCC shall deliver, or cause to be delivered, to Millennium a quarterly statement (each a "QUARTERLY STATEMENT") signed and certified by the chief financial officer of SCC, if SCC is a corporation, by a managing member, if SCC is a limited liability company, or by the chief financial officer of a corporate general partner of SCC, if SCC is a partnership (such person, the "FINANCIAL OFFICER"), to be true and correct to the best knowledge of the Financial Officer disclosing the Adjusted Net Distributable Cash for the preceding quarterly period and an itemization of the EBITDA, the Management Fee, the Percentage Equity Return Payment and the Outstanding Capital Investment for such period which were used to compute the Adjusted Net Distributable Cash. (ii) SCC shall submit, or cause to be submitted, to Millennium, on or before the ninetieth (90th) day following the end of each Lease Year (including, without limitation, the last Lease Year or partial Lease Year during the term of each Agreement of Lease, as to which SCC's obligation to pay NDC Rent shall survive the Expiration Date or sooner termination of this Agreement) an auditor's report (each, a "NDC STATEMENT"), which shall (1) be prepared, at SCC's sole cost and expense, by a so-called "Big 6" accounting firm ("SCC'S ACCOUNTING FIRM") and (2) disclose the Adjusted Net Distributable Cash for such Lease Year. Each NDC Statement shall disclose the Adjusted Net Distributable Cash for such Lease Year or fraction of a Lease Year and an itemization of the EBITDA, the Management Fee, the Percentage Equity Return Payment and the Outstanding Capital Investment for such period which were used to compute the Adjusted Net Distributable Cash. Subject to Millennium's right to dispute such NDC Statement pursuant to Article 4 hereof, if such NDC Statement shall show that the amounts, if any, paid to Millennium under Section 3.1(a) hereof exceed the amount actually due under such NDC Statement for such Lease Year, then Millennium shall credit SCC, or the applicable SCC Entity, the amount of such overpayment (together with interest thereon at the Prime Rate from the date such overpayment was paid to Millennium to the date such overpayment is credited or refunded, as applicable, as provided in this Section 3.1(b)(ii) if the actual amount of NDC Rent actually received by Millennium under Section 3.1(a) hereof was more than ten percent (10%) higher than the actual amount due and payable to Millennium pursuant to Section 3.1(a) hereof) against the next accruing installment(s) of NDC Rent and if the amount of the credit exceeds the amount of the -4- 7 subsequent installment(s) of NDC Rent due under this Agreement, the excess, together with the aforementioned interest, shall be refunded to SCC, or the applicable SCC Entity, within thirty (30) days of the receipt of such NDC Statement. If such NDC Statement shall show that the amounts, if any, paid to Millennium under Section 3.1(a) hereof are less than the amount actually due under the NDC Statement for such Lease Year, then SCC shall pay, or cause to be paid, the underpayment to Millennium contemporaneously with the delivery of such NDC Statement to Millennium, together with interest thereon from the date such payment was due to the date such payment is paid 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 plus two percent (2%) (the "PRIME RATE") if the actual amount of NDC Rent payable to Millennium under Section 3.1(a) hereof was more than ten percent (10%) higher than the amount paid to Millennium. The acceptance by Millennium of such NDC Statement, or payments of NDC Rent with respect thereto, shall be without prejudice and shall in no event constitute a waiver of Millennium's right to claim a deficiency in the payment of NDC Rent or to audit SCC's or any SCC Entity's books and records (as hereafter set forth) for a period of twenty-four (24) months from the date of receipt of such NDC Statement. If Millennium does not notify SCC in writing of any dispute as to any NDC Statement within such twenty-four (24) month period, then Millennium shall waive its right to dispute such NDC Statement. Section 3.2 (a) Provided that (i) SCC shall not then be in default of any of SCC's monetary obligations under this Agreement after the expiration of any applicable notice, grace and/or cure periods and (ii) the SCC Entities shall not then be in default of any of their respective monetary obligations under this Agreement and the Agreements of Lease after the expiration of any applicable notice, grace and/or cure periods (collectively, an "SCC EVENT OF DEFAULT"), then, in such event, if and to the extent the aggregate amount of fixed annual rent actually paid by SCC or the SCC Entities in accordance with the Agreements of Lease for a Lease Year (but without regard to any adjustment that was made to any fixed annual rent to take into account any change in the applicable index for "hard" construction costs applicable to the corresponding Leased Premises) exceeds the Average Leased Premises Rent (as hereinafter defined), the amount of any such excess (the "EXCESS AVERAGE RENT"), together with interest at the Prime Rate on the amount of any outstanding Excess Average Rent, from time to time, which exceeds any existing Outstanding Capital Investment, from time to time, shall be credited against the installment(s) of NDC Rent payable by SCC and the SCC Entities to Millennium for such Lease Year in accordance with this Agreement, it being agreed that Excess Average Rent shall not be treated as rent by the parties. Notwithstanding anything to the contrary contained in this Section 3.2, in the event of an SCC Event of Default, the portion of any Excess Average Rent which exceeds the amount of the SCC Event of Default shall be credited against the installment(s) of NDC Rent as described in the immediately preceding sentence and in the event all or any portion of Excess Average Rent is not credited against the installment(s) of NDC Rent as described in the immediately preceding sentence as a result of an SCC Event of Default, any such non-credited Excess Average Rent shall be so credited promptly following the date on which any such SCC Event of Default is cured or it has been determined in accordance with Article 5 hereof that no SCC Event of Default exists. (b) For purposes of this Agreement, Average Leased Premises Rent shall mean at any time, the product of $27.50 times the total number of rentable square feet for all Leased Premises in existence at such time; provided, however, that, for this purpose only, any Leased Premises in San Francisco, California, Boston, Massachusetts and Washington, D.C. shall be deemed to constitute exactly 100,000 rentable square feet, but such deemed size shall not have any precedential value as to how the rentable square footage of any other Leased Premises shall be calculated. -5- 8 Section 3.3 The application of the formulas described in Sections 3.1(a) and 3.2 hereof is illustrated in the examples set forth in Schedule A attached hereto (which examples are used for illustration purposes only and are not intended to limit or expand any rights, liabilities or obligations of SCC hereunder). ARTICLE 4 BOOKS AND RECORDS Section 4.1 (a) (i) In the event SCC or an SCC Entity fails to maintain such books of account or other records as required hereunder adequate for Millennium to perform an audit of the accuracy of the NDC Statement ("REQUIRED RECORDS") as provided herein for the first Lease Year, then, in such event, the Adjusted Net Distributable Cash for such Lease Year shall be the amount which, in the opinion of SCC's Accounting Firm, reflects a fair and accurate estimate of the Adjusted Net Distributable Cash for such first Lease Year, subject to Millennium's right to dispute such estimate pursuant to this Article 4. (ii) SCC shall cause each SCC Entity to prepare and keep in each such SCC Entity's main accounting office in the United States of America for a period of not less than twenty-four (24) months following the end of each Lease Year (plus any additional time during which an audit or dispute with respect to the Adjusted Net Distributable Cash for such period is pending), true, complete and accurate books of account and records of the EBITDA, the Management Fee, the Percentage Equity Return Payment, the Capital Investment and the Outstanding Capital Investment from which the Adjusted Net Distributable Cash can be determined. (iii) Millennium shall have the right, at any time and from time to time for a period of twenty-four (24) months following the submission of each NDC Statement to Millennium (which period shall be extended for any additional time during which an audit with respect thereto is pending), upon reasonable written notice, to cause a so-called "Big 6" accounting firm to perform on behalf of Millennium a complete audit to be made in accordance with standard auditing practices of all Required Records pertaining to the Adjusted Net Distributable Cash and of any one or more NDC Statements, and in connection with such audit, to examine the books of account and records (including, without limitation, all supporting data and any other records from which the Adjusted Net Distributable Cash may be tested or determined) of the Adjusted Net Distributable Cash disclosed in any statement given to Millennium; and as to SCC's and each SCC Entity's books of account and records, SCC shall make and shall cause each SCC Entity to make all such books of account and records with respect to the Adjusted Net Distributable Cash available for such examination in the United States of America at the office where the same are regularly maintained. Millennium and Millennium's accounting firm shall have the right, at Millennium's sole cost and expense, to copy and duplicate such information as Millennium may require and use SCC's and each SCC Entity's duplicating machines in connection therewith. SCC shall cooperate, and cause each SCC Entity to cooperate, with Millennium and Millennium's accounting firm in connection with any such audit and shall furnish to Millennium and Millennium's accounting firm within ten (10) days after written demand representations signed and certified by the Financial Officer of SCC and/or SCC Entity to be true and correct as may be necessary for the issuance of an audit opinion by Millennium's accounting firm with respect to Adjusted Net Distributable Cash for any Lease Year. Millennium shall promptly provide SCC with a copy of any such audit. (iv) If any such audit discloses that, with respect to the period for which Millennium conducted such audit, SCC and/or an SCC Entity paid less NDC Rent than SCC and/or an SCC -6- 9 Entity was obligated to pay in accordance with the terms and conditions of this Agreement, then SCC shall pay, or cause to be paid, Millennium the amount of such underpayment (with interest thereon at the Prime Rate from the date such payment was due to the date such payment is paid) within thirty (30) days after demand therefor and, if the audit discloses that a NDC Statement was inaccurate and the actual amount of NDC Rent payable to Millennium was more than five percent (5%) higher than the amount paid, or caused to be paid, by SCC as a result of any such inaccuracy and/or if the audit discloses that a Quarterly Statement was inaccurate and the actual amount of NDC Rent payable to Millennium was more than ten percent (10%) higher than the amount paid, or caused to be paid, by SCC as a result of any such inaccuracy, then SCC shall, in addition to such additional NDC Rent plus interest, pay, or cause to be paid, to Millennium the reasonable actual out-of-pocket cost of such audit and examination incurred by Millennium (not to exceed $7,500.00 in each instance) within thirty (30) days after demand therefor. If any such audit discloses that, with respect to the period for which Millennium conducted such audit, SCC and/or a SCC Entity paid more NDC Rent than SCC and/or a SCC Entity was obligated to pay in accordance with the terms and conditions of this Agreement, then Millennium shall credit the amount of such overpayment (with interest thereon at the Prime Rate from the date such overpayment was paid to Millennium to the date such overpayment is credited or refunded, as applicable, as provided in this Section 4.1(a)(iv)) against the next accruing installment(s) of NDC Rent and if the amount of the credit exceeds the amount of the subsequent installment(s) of NDC Rent due under this Agreement, the excess shall be refunded to SCC, or the applicable SCC Entity, within thirty (30) days after any such audit by Millennium. If any audit shall be commenced by Millennium or if there shall arise a dispute concerning the Adjusted Net Distributable Cash, then, and in any such event, the books of account and records required to be maintained shall be preserved and retained until such audit has been completed or there has been a final resolution or final determination of such dispute or any related litigation. (b) If SCC shall fail to prepare and deliver, or shall fail to cause to be prepared and delivered, any NDC Statement, Millennium shall have the right, in addition to any other rights or remedies Millennium may have hereunder, to audit the Required Records, and to prepare the statement or statements which SCC has failed to prepare and deliver, or which SCC has failed to cause to be prepared and delivered. Such audit shall be made and such statement(s) shall be prepared by an independent certified public accountant selected by Millennium. Subject to SCC's arbitration rights under Article 5 hereof, the statement(s) prepared by Millennium shall be conclusive and binding upon SCC, and SCC shall pay, or cause to be paid, within fifteen (15) days after rendition of a bill, all expenses incurred in the preparation of such statement(s) and all sums, if any, as may be shown by such audit to be due as NDC Rent, together with interest thereon at the Prime Rate from the date such payment was due hereunder. (c) If a dispute arises with respect to the determination of the Adjusted Net Distributable Cash, or NDC Rent payable hereunder which dispute is not resolved within thirty (30) days after the date that NDC Rent is due hereunder, either party may by notice to the other submit the dispute to arbitration pursuant to Article 5 hereof. Pending the determination of such dispute, SCC shall pay, or cause to be paid, all amounts not in dispute in accordance with Section 3.1(a) hereof. If such arbitration shall mandate that additional amounts are due Millennium, then SCC shall pay, or cause to be paid, to Millennium such amount with interest thereon at the Prime Rate from the date such payment was due hereunder. (d) Millennium shall at all times maintain the confidentiality of the Quarterly Statements and the NDC Statements, except to the extent reasonably necessary to (i) comply with applicable laws, regulations, court or administrative orders, or to prosecute or defend any claim or suit by litigation or otherwise under this Agreement or any Agreement of Lease, and (ii) provided that the recipients of such information agree -7- 10 in writing to hold same in confidence (1) carry out the obligations set forth in this Agreement or any Agreement of Lease or documents evidencing and/or securing any ground leases or underlying leases which may now exist or hereafter be executed affecting any or all of the Leased Premises, any lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which any or all of the Leased Premises is specified as security, and any condominium documents and any private covenants, conditions or restrictions or reciprocal easements which may now or hereafter be recorded encumbering any or all of the Projects, (2) obtain legal, financial and/or tax advice from Millennium's attorneys, accountants and financial advisors, (3) negotiate or complete a transaction with a lender to Millennium or any Millennium Entity secured by Millennium's and/or any Millennium Entity's interest in any or all of the Projects, any or all of the buildings situated on Projects or any or all of the Agreements of Lease (including, without limitation, a pledge of rents payable thereunder) or purchaser of any or all of the buildings situated on Projects or any or all of the Projects or (4) negotiate or complete a public or private syndication or similar offering with respect to any or all of the Agreements of Lease, Millennium or any or all of the Millennium Entities, the interests of any of the members of Millennium or any or all of the Millennium Entities, any or all of the Projects and/or any or all of the buildings situated on any or all of the Projects. ARTICLE 5 ARBITRATION Section 5.1 In each case specified in this Agreement in which resort to arbitration shall be required, such arbitration (unless otherwise specifically provided in other Sections of this Agreement) shall be in New York City with respect to the first, third, fifth and each subsequent odd arbitration entered into in connection with this Agreement and in Los Angeles, California with respect to the second, fourth, sixth and each subsequent even arbitration entered into in connection with this Agreement in accordance with the Commercial Arbitration Rules of the American Arbitration Association and the provisions of this Agreement, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Section 5.2 Either party may request arbitration of any matter in dispute wherein arbitration is expressly provided in this Agreement as the appropriate remedy. The party requesting arbitration shall do so by giving written notice to that effect to the other party, specifying in such notice the nature of the dispute and the name and address of the person designated to act as an arbitrator on its behalf. Within fifteen (15) days after the service of such notice, the other party shall give notice to the first party specifying the name and address of the person designated to act as an arbitrator on its behalf. If the second party fails to notify the first party of the appointment of its arbitrator, as aforesaid, within the time above specified, then the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator in a case where the two arbitrators appointed hereunder and the parties are unable to agree upon such appointment. The two arbitrators so chosen shall meet within ten (10) days after the second arbitrator is appointed and if, within thirty (30) days after the second arbitrator is appointed, the two arbitrators shall not agree upon the question in dispute, they shall together appoint a third arbitrator. In the event of their being unable to agree upon such appointment within thirty (30) days after the appointment of the second arbitrator, the third arbitrator shall be selected by the parties themselves if they can agree thereon within a further period of fifteen (15) days. If the parties do not so agree, then either party, on behalf of both and on notice to the other, may request such appointment by the American Arbitration Association (or any organization successor thereto) in accordance with its rules then prevailing or if the American Arbitration Association (or such successor organization) shall fail to appoint said third arbitrator within fifteen (15) days after such request is made, then either party may apply, on notice to the other, to the Supreme Court in the County of New York or in the County of Los Angeles, as applicable (or any other court having jurisdiction and exercising functions -8- 11 similar to those now exercised by such court) for the appointment of such third arbitrator. Such third arbitrator chosen or appointed pursuant to this Section shall be a disinterested person and each arbitrator chosen or appointed shall have at least ten (10) years' experience in the County of New York or in the County of Los Angeles, as applicable, in a calling connected with the dispute. Section 5.3 The arbitrators shall have the right to retain and consult experts and competent authorities skilled in the matters under arbitration. The arbitrators shall render their award, upon the concurrence of at least two (2) of their number, within sixty (60) days after the appointment of the third arbitrator. Such award shall be in writing and shall be final and conclusive on the parties and counterpart copies thereof shall be delivered to each of the parties. In rendering such decision and award, the arbitrators shall not add to, subtract from or otherwise modify the provisions of this Agreement. Judgment may be had on the decision and award of the arbitrators so rendered, in any court of competent jurisdiction. Section 5.4 If for any reason whatsoever the written decision and award of the arbitrators shall not be rendered within sixty (60) days after the appointment of the third arbitrator, then at any time thereafter before such decision and award shall have been rendered either party may apply to the Supreme Court of the State of New York or to the Supreme Court of the State of California, as applicable, or to any other court having jurisdiction and exercising the functions similar to those now exercised by such court, by action, proceeding or otherwise (but not by a new arbitration proceeding) as may be proper to determine the question in dispute consistently with the provisions of this Agreement. Section 5.5 Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by or for such party, as well as the attorneys' fees, witness fees and similar expenses incurred by such party, and the fees and expenses of the third arbitrator and all other expenses of the arbitration shall be borne by the parties equally. Notwithstanding the foregoing, if a majority of the arbitrators determine that the position of either party was taken wilfully and is without merit or the consent of either party was unreasonably withheld or delayed, the arbitrators may require such party to bear all the expenses of the arbitration as well as the prevailing party's witness fees, attorney fees and similar expenses. Section 5.6 In the case of any arbitration hereunder, the arbitrators shall be instructed and will give effect to the intent of this Agreement. ARTICLE 6 BILLS AND NOTICES Section 6.1 Except as otherwise expressly provided in this Agreement, any bills, statements, consents, notices, demands, requests or other communications given or required to be given under this Agreement shall be in writing and shall be deemed sufficiently given or rendered (a) if delivered by hand (against a signed receipt) or (b) if sent by registered or certified mail (return receipt requested) or (c) overnight courier (e.g., Federal Express) or (d) facsimile transmission (with confirmed answer back) addressed: (i) if to Millennium at Millennium's address set forth in this Agreement, Attention: Chief Financial Officer with a copy to Battle Fowler LLP, 75 East 55th Street, New York, New York 10022, Attention: Eric R. Landau, Esq.; and (ii) if to SCC at SCC's address set forth in this Agreement, Attention: Chief Financial Officer with copies to SCC Sports Club, Inc., 11100 Santa Monica Boulevard, Suite 300, Los Angeles, California -9- 12 90025, Attention: Real Estate Department and Resch Polster Alpert & Berger LLP, 10390 Santa Monica Boulevard, Fourth Floor, Los Angeles, California 90025, Attention: Ronald M. Resch, Esq.; or to such other or additional address(es) as Millennium or SCC may designate as its new address(es) for such purpose by notice given to the other in accordance with the provisions of this Article 6. Any such bill, statement, consent, notice, demand, request or other communication shall be deemed to have been rendered or given on the date when it shall have been had delivered provided receipt or refusal is acknowledged or seven (7) days from when it shall have been mailed or on the next business day if sent by overnight courier, or on the day of receipt if sent by facsimile transmission with confirmed answer back, as provided in this Article. Any notice, demand or request sent by facsimile transmission shall be promptly (within one (1) business day) followed by such notice, demand or request being sent or delivered, as the case may be, as provided in (a), (b) or (c) in this Section. Any notice, demand or request sent by Millennium to SCC may be sent by Millennium's attorneys and any notice, demand or request sent by SCC to Millennium may be sent by SCC's attorneys. ARTICLE 7 MISCELLANEOUS Section 7.1 If SCC shall fail to pay, or shall fail to cause to be paid, NDC Rent within seven (7) days after same shall be due hereunder, SCC shall pay to Millennium, in addition to such NDC Rent then due and payable, interest thereon at an amount based upon the Prime Rate (i.e., the Prime Rate applied to the amount due), for the period from the date on which the NDC Rent payment was due until the date of payment thereof in full. Notwithstanding the foregoing, on the first occasion in any calendar year on which any such amount would be due and payable by SCC hereunder, SCC shall not be obligated to pay any such amount unless Millennium shall have first given SCC notice that NDC Rent is past due and SCC shall have failed to pay such sum within seven (7) days after receipt of such notice. Section 7.2 If any default shall occur and be continuing, Millennium may enforce its rights by suit in equity, by action at law, or by any other appropriate proceedings, whether for damages, specific performance (to the extent permitted by law) of any covenant or agreement contained in this Agreement or in the aid of the exercise of any power granted in this Agreement. Section 7.3 No right or remedy conferred upon or reserved to Millennium under this Agreement is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing under applicable law. Every right and remedy given by this Agreement or by applicable law to Millennium may be exercised from time to time and as often as may be deemed expedient by Millennium. Section 7.4 If any legal action or proceeding is brought against Millennium or SCC by the other with respect to this Agreement, then the non-prevailing party shall pay the prevailing party's attorneys' fees and disbursements arising out of or incurred in connection with such action or proceeding. Section 7.5 No failure or delay on the part of a party to this Agreement in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power preclude any other or further exercise thereof or the exercise of any other right or power hereunder. No modification or waiver of any provision of this Agreement and no consent to any departure by any party to this Agreement therefrom shall be effective unless the same shall be in writing and signed by the party against whom such modification, waiver or consent is being sought to be enforced against, and then such modification, waiver or -10- 13 consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any party to this Agreement in any case shall, of itself, entitle such party to any other or further notice or demand in similar or other circumstances. Section 7.6 This Agreement may only be modified, amended, changed, discharged or terminated by an agreement in writing signed by all of the parties hereto. Section 7.7 Each of the parties to this Agreement (and the undersigned representatives of such parties, if any) has the full power, authority and legal right to execute this Agreement and to keep and observe all of the terms, covenants and provisions of this Agreement on such parties' respective parts to be performed or observed. Section 7.8 If any term, covenant or provision of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such term, covenant or provision. Section 7.9 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Section 7.10 This Agreement sets forth the entire agreement and understanding of the parties hereto with respect to the specific matters agreed to herein and the parties hereto acknowledge that no oral or other agreements, understandings, representations or warranties exist with respect to this Agreement or with respect to the obligations of the parties hereto under this Agreement, except those specifically set forth in this Agreement. Section 7.11 THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THIS AGREEMENT. Section 7.12 This Agreement is, and shall be deemed to be, a contract entered into under and pursuant to the laws of the State of New York and shall be in all respects governed, construed, applied and enforced in accordance with the laws of the State of New York. No defense given or allowed by the laws of any other state or country shall be interposed in any action or proceeding hereon unless such defense is also given or allowed by the laws of the State of New York. Section 7.13 The parties hereto agree to submit to personal jurisdiction in the State of New York or California in any action or proceeding arising out of this Agreement and, in furtherance of such agreement, the parties hereto hereby agree and consent that without limiting other methods of obtaining jurisdiction, personal jurisdiction over any of the parties hereto in any such action or proceeding may be obtained within or without the jurisdiction of any court located in the City of New York or the City of Los Angeles and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon the parties hereto by registered or certified mail or by personal service at the last known address of the parties hereto, whether such address be within or without the jurisdiction of any such court. Section 7.14 This Agreement may be executed in one or more counterparts by some or all of the parties hereto, each of which counterparts shall be an original and all of which together shall constitute a single agreement. Section 7.15 This Agreement may be executed in any number of duplicate originals and each such duplicate original shall be deemed to constitute but one and the same instrument. -11- 14 Section 7.16 Notwithstanding anything to the contrary set forth herein, but subject to the provisions set forth in the Option Agreement, neither Millennium nor any Millennium Entity shall have any obligation or liability to SCC or any SCC Entity with respect to any Project unless and until an Agreement of Lease with respect thereto has been unconditionally executed and delivered by all parties thereto. -12- 15 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. MILLENNIUM PARTNERS LLC 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 Collins -------------------------------- Name: Brian Collins Title: THE SPORTS CLUB COMPANY By: /s/ John M. Gibbons -------------------- Name: John M. Gibbons Title: President -13- 16 Schedule A [attached hereto] EX-10.85 24 EXHIBIT 10.85 1 EXHIBIT 10.85 FIRST AMENDMENT TO LEASE BETWEEN RCPI TRUST AND THE REGISTRANT OCTOBER 30, 1998 2 FIRST AMENDMENT TO LEASE This FIRST AMENDMENT TO LEASE, dated as of October 30, 1998 (this "Amendment"), between RCPI TRUST, a Delaware Business trust having an office c/o Tishman Speyer Properties, L.P., 45 Rockefeller Plaza, New York, New York 10111 ("Landlord"), and The Sports Club Company, Inc., a Delaware corporation having an office at 11100 Santa Monica Boulevard, Suite 300, West Los Angeles, California 90025 ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant entered into that certain Lease, dated February 27, 1998 (the "Original Lease"), covering portions of the first, second, third, and fourth floors of the building located at 630 Fifth Avenue, New York, New York; and WHEREAS, Landlord and Tenant desire to modify the Original Lease as hereinafter set forth to provide for the substitution of a new floor plan for the Third Floor Premises and otherwise as provided herein (the Original Lease, as modified by this Amendment, the "Lease"). NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Capitalized Terms. All capitalized terms used herein and not otherwise defined in this Amendment shall have the meanings ascribed to them in the Original Lease. 2. Modification. (a) Effective as of the date hereof, the Original Lease shall be amended by deleting the floor plan for the Third Floor Premises attached to the Original Lease as Exhibit A-5 and substituting therefor the floor plan attached to this Amendment as Exhibit A. (b) Tenant hereby agrees that Landlord, at Landlord's option, may modify the Second Floor C Premises to accommodate a means of egress for the adjacent tenant along Column Line J between Column Line 5.8 and Column Line 3 (as such columns are designated on First Floor and Second Floor Construction Plan, dated October 12, 1998, prepared by Cannon). 3. Delivery of Premises. Notwithstanding anything to the contrary provided in the Lease. Landlord and Tenant hereby agree that Landlord shall have delivered and Tenant shall have accepted possession of the First Floor Premises, the Second Floor A Premises and the Third Floor Premises on November 1, 1998. Accordingly, the Rent Commencement Date with respect to the First Floor Premises, the Second Floor A Premises and the Third Floor Premises shall be August 1, 1999 for all purposes of the Lease. 3 4. No Modification. Except as set forth herein, nothing contained in this Amendment shall be deemed to amend or modify in any respect the terms, provisions, or conditions of the Original Lease and such terms, provisions, and conditions shall remain in full force and effect as modified hereby. 5. Construction. If there is any inconsistency between the terms of this Amendment and the terms of the Original Lease, the terms of this Amendment shall be controlling and prevail. 6. Entire Agreement. This Amendment contains the sole and entire understanding and agreement of the parties with respect to its entire subject matter and all prior negotiations, discussions, representations, agreements and understandings heretofore had among the parties with respect thereto are merged herein. 7. Counterparts. This Amendment may be executed in duplicate counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument. Facsimile execution of this Amendment shall be deemed to be an original for all purposes. 8. Representations and Warranties. Tenant hereby represents and warrants to Landlord that, as of the date hereof, (i) the Original Lease is in full force and effect and has not been modified except pursuant to this Amendment; (ii) to the best of Tenant's knowledge, there are no defaults existing under the Lease' (iii) to the best of Tenant's knowledge there exist no valid abatements, causes of action, counterclaims, disputes, defenses, offsets, credits, deductions, or claims against the enforcement of any of the terms and conditions of the Lease; and (iv) this Amendment has been duly authorized, executed and delivered by Tenant and constitutes the legal, valid and binding obligation of Tenant. 9. Miscellaneous. (a) This Amendment shall be governed by the laws of the State of New York without giving effect to conflict of laws principles thereof. (b) This Amendment shall be binding upon and inure to the benefit of Landlord and Tenant and their successors and permitted assigns. (c) The captions, headings, and titles in this Amendment are solely for convenience of reference and shall not affect its interpretation. (d) This Amendment shall not be binding upon Landlord or Tenant unless and until Landlord shall have delivered a fully executed counterpart of this Amendment to Tenant. 4 IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the day and year first above written. LANDLORD: RCPI TRUST By: Tishman Speyer Properties, L.P., its Agent By: /s/ Peter Fair ------------------------------------- Peter Fair TENANT: THE SPORTS CLUB COMPANY, INC. By: /s/ Mark Spino ------------------------------------- Name: Mark Spino Title: Vice President 5 EXHIBIT A THIRD FLOOR PREMISES The floor plan which follows is intended solely to identify the general location of the Third Floor Premises, and should not be used for any other purpose. All areas, dimensions and locations are approximate, and any physical conditions indicated may not exist as shown. EX-10.86 25 EXHIBIT 10.86 1 EXHIBIT 10.86 SECOND AMENDMENT TO LEASE BETWEEN RCPI TRUST AND THE REGISTRANT MARCH 4, 1999 2 SECOND AMENDMENT TO LEASE This SECOND AMENDMENT TO LEASE, dated as of March 4, 1999 (this "Amendment"), between RCPI TRUST, a Delaware business trust having an office c/o Tishman Speyer Properties, L.P., 45 Rockefeller Plaza, New York, New York 10111 ("Landlord"), and THE SPORTS CLUB COMPANY, INC., a Delaware corporation having an office at 11100 Santa Monica Boulevard, Suite 300, West Los Angeles, California 90025 ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant entered into that certain Lease, dated as of February 27, 1998, as amended by First Amendment to Lease, dated as of October 30, 1998 (as amended, the "Original Lease"), covering portions of the first, second, third, and fourth floors of the building located at 630 Fifth Avenue, New York, New York; and WHEREAS, Landlord and Tenant desire to modify the Original Lease as hereinafter set forth to provide for the surrender of the Fourth Floor Premises (the Original Lease, as modified by this Amendment, the "Lease"). NOW, THEREFORE, in consideration of the mutual covenants herein contained, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord and Tenant agree as follows: 1. Capitalized Terms. All capitalized terms used herein and not otherwise defined in this Amendment shall have the meanings ascribed to them in the Original Lease. 2. Modification. Effective as of the date of this Amendment, the Lease with respect to the Fourth Floor Premises shall end and expire and Tenant's estate and interest in the Fourth Floor Premises shall terminate and be wholly extinguished with the same force and effect as if such date was initially set forth in the Lease as the Expiration Date, and Landlord shall be entitled to lease the Fourth Floor Premises to any person or entity, or take any other action with respect thereto, free from any claim of Tenant or any person or entity claiming through Tenant. Effective as of the date of this Amendment, the term "Premises" as used in the Lease shall no longer include the Fourth Floor Premises and Landlord and Tenant shall have no further obligations under the Lease with respect to the Fourth Floor Premises. Landlord and Tenant hereby acknowledge that the Fourth Floor premises have never been delivered to Tenant. Tenant represents and warrants that it has not assigned, pledged or encumbered the Lease or sublet the Fourth Floor Premises or done or suffered any other action as a result of which the Lease or the Fourth Floor Premises might be subject to any lien or encumbrance. 3 3. No Modification. Except as set forth herein, nothing contained in this Amendment shall be deemed to amend or modify in any respect the terms, provisions, or conditions of the Original Lease and such terms, provisions, and conditions shall remain in full force and effect as modified hereby. 4. Construction. If there is any inconsistency between the terms of this Amendment and the terms of the Original Lease, the terms of this Amendment shall be controlling and prevail. 5. Entire Agreement. This Amendment contains the sole and entire understanding and agreement of the parties with respect to its entire subject matter and all prior negotiations, discussions, representations, agreements and understandings heretofore had among the parties with respect thereto are merged herein. 6. Counterparts. This Amendment may be executed in duplicate counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute one and the same instrument. Facsimile execution of this Amendment shall be deemed to be an original for all purposes. 7. Representations and Warranties. Tenant hereby represents and warrants to Landlord that, as of the date hereof, (i) the Original Lease is in full force and effect and has not been modified except pursuant to this Amendment; (ii) to the best of Tenant's knowledge, there are no defaults existing under the Lease; (iii) to the best of Tenant's knowledge there exist no valid abatements, causes of action, counterclaims, disputes, defenses, offsets, credits, deductions, or claims against the enforcement of any of the terms and conditions of the Lease; and (iv) this Amendment has been duly authorized, executed and delivered by Tenant and constitutes the legal, valid and binding obligation of Tenant. 8. Miscellaneous. (a) This Amendment shall be governed by the laws of the State of New York without giving effect to conflict of laws principles thereof. (b) This Amendment shall be binding upon and inure to the benefit of Landlord and Tenant and their successors and permitted assigns. (c) The captions, headings, and titles in this Amendment are solely for convenience of reference and shall not affect its interpretation. 4 (d) This Amendment shall not be binding upon Landlord or Tenant unless and until Landlord shall have delivered a fully executed counterpart of this Amendment to Tenant. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the day and year first above written. LANDLORD: RCPI TRUST By: Tishman Speyer Properties, L.P., its Agent By: /s/ Geoffrey P. Wharton ------------------------------------- Geoffrey P. Wharton TENANT: THE SPORTS CLUB COMPANY, INC. By: /s/ David M. Talla ------------------------------------- Name: David M. Talla Title: CEO EX-10.87 26 EXHIBIT 10.87 1 EXHIBIT 10.87 SAN FRANCISCO LEASE 2 ATHLETIC CLUB LEASE San Francisco, California LANDLORD: CB-1 ENTERTAINMENT PARTNERS LP TENANT: S.F. SPORTS CLUB, INC. DATE: As of June 1, 1997 3 INDEX OF MAJOR DEFINED TERMS
DEFINED TERM PAGE - ------------ ---- AAA 16 Abatement Notice 56 Actual Statement 17 Additional Rent 10 Affiliate 9 Agency 52 Agency Requirements 53 All-risk 33 Allowance 1 Annual Base Rent 10 Antennae 58 Assignment Date 44 Assignment Notice 44 Building 1 Building Improvements 1 CC&R 19 Claims 32 Club 1 Commencement Date 3 Common Area Expenses 11 Common Areas 2 Condominium Association 19 Condominium Documents 19 Control 45 CPI 51 Cure Period 56 DDA 52 Deadline Date 57 Default 42 Depository 39 Development 1 Fair Market Parking Rate 51 Financial Officer 38 First-class 19 Floor Area 2 Force Majeure 57 Four Seasons Standard 22 Hazardous Materials 20 Hotel 9 Hotel Management Agreement 9
4
DEFINED TERM PAGE - ------------ ---- Improvements 1 In-Lieu Tax 26 Initial Annual Base Rent Amount 10 Initial Term 3 Jobs Program 53 Landlord 1 Landlord Delay 5 Landlord Offer 38 Landlord's Contribution 1 Landlord's First Substantial Completion Estimate Notice 6 Landlord's Insurance 35 Landlord's Second Substantial Completion Estimate Notice 6 Lease 1 Lease Year 6 Marriott Bill 8 Marriott Hotel 8 Marriott Hotel Guests 8 Minimum Landlord's Work 4 Monthly Base Rent 11 Mortgagee Non-Disturbance Agreement 47 New York Athletic Club Lease 15 Non-Disturbance Agreement 46 Noticed Lender 55 Operating Expenses 12 Option 7 Option Date 7 Option Period 7 Other Primary Hotel Operator 22 Partial Taking 41 Person 45 Premises 1 Primary Hotel 8 Primary Hotel Bill 9 Primary Hotel Guests 8 Prime Rate 43 Property 2 Real property taxes 26 Receipts Tax 26 Rent 10 Requirements 52 Scheduled Completion Date 3 Secured Lender 40 Senior Interest Holders 46
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DEFINED TERM PAGE - ------------ ---- Senior Interests 46 Signage Approval Factors 55 Substantial Taking 41 Substantially Complete 3 Tax Year 24 Taxes 24 Temporary Closures 42 Tenant 1 Tenant Acceptance Notice 38 Tenant Delay 4 Tenant Installation 58 Tenant Revision 5 Tenant Termination Costs 38 Tenant's Insurance Share 40 Tenant's Share 15 Tenant's Work 3 Term 7 Termination Notice 56 Total Taking 41 Trade Fixtures 2 Unexpired Lease Term 38 Uninsured Contribution Amount 37 Work Letter 1
iii 6 ATHLETIC CLUB LEASE San Francisco, California THIS LEASE (the "LEASE") is made as of the 1st day of June, 1997, by and between CB-1 ENTERTAINMENT PARTNERS LP, a California limited partnership ("LANDLORD") and S.F. SPORTS CLUB, INC., a Delaware corporation ("TENANT"). 1. Premises and Common Areas. 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. 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 shall constitute part of a development (the "DEVELOPMENT") as shown on the site plan attached hereto as Exhibit B and made a part hereof. The Premises are designated on the non-hatched portion of Exhibit B, 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. Construction of Premises. 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 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 7 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." 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. 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: 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 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. 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 -2- 8 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 rules of the San Francisco, California 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 94,774 square feet. 2. Term. -3- 9 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 (A) six (6) months after Landlord shall "Substantially Complete" (as defined herein) the Minimum Landlord's Work (as defined herein) and (B) twelve (12) months after the installation of the concrete decks on floors 2,3,4, and 5 of the Premises (the "SCHEDULED COMPLETION DATE"), the Scheduled Completion Date being extended by any period that Tenant using reasonable diligence shall have been unable to (aa) 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 (1) from the parking areas of the Building and the parking areas of the Building are reasonably accessible and usable for parking purposes and (2) 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"): 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 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 -4- 10 any acts or omissions of Tenant, or of any Affiliate (as defined herein) of Tenant, 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 Tenant's unreasonable delay or refusal in making changes to the Work Letter reasonably requested by Landlord; or any breach of any of the terms of this Lease by Tenant that 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 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 -5- 11 Tenant's approval or disapproval of Landlord's estimate with respect to a Tenant 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, (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 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 decks are installed on floors 2,3,4 and 5 of the Premises 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 -6- 12 decks are installed on floors 2, 3, 4 and 5 of the Premises, provided that if Tenant shall be aware of any such delay, Tenant shall immediately notify Landlord thereof. With 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. 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 -7- 13 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 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. Marriott Hotel Guests. Tenant shall permit room guests of the existing adjoining convention hotel, currently being operated as a Marriott Hotel (such hotel, the "MARRIOTT HOTEL" and such room guests of such hotel, the "MARRIOTT 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 daily fee payments equal to seventy-five percent (75%) of the otherwise applicable daily rate of guests of the Club members; provided, however, Tenant shall only be obligated to permit up to one hundred (100) Marriott Hotel Guests daily. The operator of -8- 14 the Marriott Hotel shall be responsible for billing and collecting payment from the Marriott Hotel Guests directly, and shall make all payments to Tenant on a monthly basis. Tenant shall issue the operator of the Marriott Hotel a bill ("MARRIOTT BILL") payable on the tenth (10th) day of each calendar month, with such Marriott Bill to be based on the actual number of daily passes Tenant provided to the Marriott Hotel Guests for the previous calendar month. If the operator of the Marriott Hotel does not pay in full the Marriott Bill within thirty (30) days from its receipt of the Marriott Bill, then, in such event , Tenant may deliver a termination notice to the operator of the Marriott Hotel terminating the right of the Marriott Hotel and Marriott 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 Marriott Hotel. In the event the Marriot 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 Marriot Hotel shall have entered into an agreement with respect to this Section 4.1 (a copy of which Tenant shall promptly deliver to Landlord), Landlord shall reasonably cooperate with Tenant in seeking to obtain the performance of the Marriott Hotel with respect to such applicable terms and conditions of this Section 4.1. Other Hotel Guests. Tenant shall permit room guests of the to-be constructed hotel in the Development, currently contemplated to be operated as a Four Seasons Hotel (such hotel (which, for purposes of this Lease, shall include any extended stay 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 reasonable daily fee payment. Tenant hereby agrees and covenants that in no event shall the daily fee charged to the Primary Hotel Guests exceed the daily fee charged to Marriot Hotel Guests. The operator of the Primary Hotel shall be responsible for billing and collecting payment from the Primary Hotel Guests directly, and shall make all payments to Tenant on a monthly basis. Tenant shall issue the operator of the Primary Hotel a bill ("PRIMARY HOTEL BILL") payable on the tenth (10th) day of each calendar month, with such Primary Hotel Bill to be based on the actual number of daily passes Tenant provided to the Primary Hotel Guests for the previous calendar month. 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 4.2 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 4.2 (a -9- 15 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 4.2 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 4.2 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. For purposes of this Section 4.2, "AFFILIATE" shall mean a Person (as defined herein) which shall (i) control (as defined herein), (ii) be under the control of, or (iii) be under common control with the Person in question. 0.1 Performance by Marriott Hotel and Primary Hotel. If the Marriott Hotel and/or the Primary Hotel (collectively and generically, the "HOTEL") shall default in any of their respective obligations under Section 4.1 or 4.2 hereof, or there shall exist a bona fide dispute with the Hotel under Section 4.1 or 4.2 hereof and Tenant notifies Landlord in writing that Tenant has previously notified the Hotel of such dispute and that such default or notice has been disregarded or not reasonably satisfactorily acted upon, then upon Tenant's written request and provided Tenant is not in default under this Lease, Landlord shall use reasonable efforts to enforce Landlord's rights under the applicable hotel management agreement with the Hotel (collectively and generically, the "HOTEL MANAGEMENT AGREEMENT") for Tenant's benefit, including, without limitation, giving notices, claims and demands to and on the 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 Hotel's breach of the Hotel's obligations under Section 4.1 or 4.2 hereof. If, after written request from Tenant, Landlord shall fail or refuse to take appropriate action for the enforcement of Landlord's rights against the Hotel with respect to Section 4.1 or 4.2 hereof, Tenant shall have the right to take such action in Tenant's own name, and for such purpose and only to such extent, all of the rights of Landlord under the applicable 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 or 4.2 hereof; provided, however, that (a) Tenant shall only have such rights if Tenant shall not be in default under this Lease and (b) 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 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 written 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. -10- 16 0.2 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. 0.3 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: 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 Three Million and 00/100 Dollars ($3,000,000.00) 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 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 -11- 17 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. 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 $1,000,000 to be applied against (i) the monthly installments of Common Area Expenses or Operating Expenses (as hereinafter defined), as applicable, payable by Tenant in accordance with Section 7 hereof, (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. 6. Club Name. Tenant shall be entitled to operate the Club under the name "The Sports Club/San Francisco," 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. 7. Common Area Expenses/Operating Expenses. 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 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 -12- 18 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. 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 -13- 19 salaries; real estate brokers' commissions; or principal or interest on any indebtedness (except as specifically permitted above). 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: the cost of capital expenditures except for those specifically described in Section 7; 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); costs incurred to the extent that such costs are reimbursed by insurance; any ground lease or master lease payments; 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; 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; 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); 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; costs paid to Affiliates of Landlord in excess of market rates; 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; -14- 20 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; Landlord's general overhead and general administrative expenses; 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); 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); costs to repair latent or patent defects with respect to the Development or Landlord's Work; costs incurred due to the violation by Landlord or any other occupant of the Development of the terms or conditions of any lease; costs arising from or relating to the presence of Hazardous Materials (as defined herein) in or about the Development; 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); insurance premiums, but only if and to the extent Landlord is reimbursed for the cost thereof by Landlord's insurers; bad debt expenses resulting from Landlord's negligence or improper acts; costs of charitable or political contributions and fees and dues paid to trade associations (other than as provided in Section 7.1 hereof); any cost payable by Tenant pursuant to other Sections of this Lease; and any Operating Expenses or Common Area Expenses, as applicable, reasonably allocable to any parking structure located within the Development. 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 -15- 21 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 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 Tenant will pay Tenant's equitable share of Operating Expenses 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, that 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 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 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 following provisions hereof within ten (10) days next following the -16- 22 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 fall 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 San Francisco, California and shall not be affiliated with either Landlord or Tenant. The three arbitrators shall conduct such hearings as they deem appropriate, 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 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 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. -17- 23 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 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. 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 -18- 24 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. 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. 8. Use. Permitted Use. 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. 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, 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 -19- 25 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. Compliance with Laws. 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 declaration, 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 (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 obligations hereunder. 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. 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 -20- 26 exceed the legally permissible decibel levels, the same shall not constitute a nuisance for the purposes hereof. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 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 and social club and Tenant's cooking operations with respect to the Club subject to and in accordance with this Lease. Hazardous Materials. 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, 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, 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. 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 -21- 27 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, 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. 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, (a) 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 (b) 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 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 if the operator of the Primary Hotel is the Four Seasons or an Affiliate thereof, in a manner consistent with the typical standard of operation with respect thereto of the Four Seasons in the United States as of the date hereof (the "FOUR SEASONS STANDARD") or otherwise in a manner consistent with the typical standard of operation with respect thereto of the then operator of the Primary Hotel in the United States (the "OTHER PRIMARY HOTEL OPERATOR"); provided, however, that with respect to the standard of operation of an Other Primary Hotel Operator any such standard of operation shall not increase (except to a de minimis extent) the cost and expense to Tenant (which will not be recouped by Tenant) to provide spa services in the Premises and/or operate a beauty salon in the Premises beyond that which Tenant would have incurred in connection with the Four Seasons Standard and Tenant shall not be required to remodel and/or reformat the portions of the Premises providing spa services and/or being operated as a beauty salon as a direct result of the conversion from the Four Seasons Standard to the standard of operation of an Other Primary Hotel Operator. -22- 28 9. Notices. All notices, 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: SCC Sports Club, Inc. 11100 Santa Monica Boulevard Suite 300 Los Angeles, California 90025 Attention: Real Estate Dept. Fax: (310) 479-8879 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 written 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 -23- 29 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. 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 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 -24- 30 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. 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 -25- 31 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 in writing, 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. Trade Fixtures. Tenant shall be liable for and shall pay, before delinquency, all taxes levied against Trade Fixtures. 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, 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 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, 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. 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, -26- 32 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. 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 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, -27- 33 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. 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. 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 written consent. Before proceeding with any alteration, addition or improvement which requires Landlord's prior written 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. 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 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 -28- 34 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. 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 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 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. 16. Repairs. 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 -29- 35 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. Landlord's Obligations. Subject to the last sentence of this Section 15.2, 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. 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 -30- 36 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 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 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. 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 -31- 37 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 chilled 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 Tenant's use and possession of the Premises, or any part thereof, or give Tenant any right to terminate this Lease. 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. 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 -32- 38 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, 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. 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 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, 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. 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. -33- 39 20. Insurance. 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: 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. 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 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. Workers' Compensation. Workers' Compensation and Employer's Liability insurance (as required by state law). 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. Liquor. Liquor liability insurance coverage with commercially reasonable coverage limits, but in no event less than $5,000,000.00 per occurrence, naming -34- 40 Landlord, the Condominium Association and any mortgagee of Landlord as additional insureds. Any such coverage requirement may be satisfied by an umbrella policy. Requirements. All policies required of Tenant shall be written by an insurer satisfactory to Landlord. 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 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. 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. 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 -35- 41 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-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. 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. 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. 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. (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, -36- 42 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 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), 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 -37- 43 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 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 written 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 -38- 44 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 of the Tenant Acceptance Notice, to nullify the Tenant Acceptance Notice by delivering to Tenant written 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. Depository. The "DEPOSITORY" shall be a bank or trust company authorized to do business in the State of California, 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 -39- 45 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 expenses, Landlord and Tenant shall share equally the fees and expenses of the Depository. 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. 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. -40- 46 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 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. -41- 47 22. Eminent Domain. 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. 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 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 -42- 48 of this Section 22.2, a temporary taking shall be defined as a taking for a period of ninety (90) days or less. Waiver. Landlord and Tenant each hereby waive any statutory rights of termination which may arise by reason of a taking. 23. Defaults and Remedies. Defaults. The occurrence of any one or more of the following events shall constitute a default hereunder by Tenant ("DEFAULT"): 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. 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; 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; (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 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 -43- 49 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 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. 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: the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus 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 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 damages which may be suffered by the other as a result of a default by Landlord or default by Tenant under this Lease. Re-entry. In the event of any Default, Landlord shall also have the right, without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this Section 23.3 shall be construed as an election to -44- 50 terminate this Lease unless a notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. 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. 24. Assignment and Subletting. Landlord's Consent. Except as otherwise expressly provided in the last sentence of Section 8.1 hereof and in Section 24.3 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. Notice. Subject to the provisions of Article 46 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. 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 -45- 51 24 unless Landlord's prior written 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 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. -46- 52 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 (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. -47- 53 Landlord shall deliver contemporaneously with the execution of this Lease by Landlord the form of non-disturbance agreement annexed hereto as Exhibit H from Fleet Bank, National Association (the "MORTGAGEE NON-DISTURBANCE AGREEMENT") and such Mortgagee Non-Disturbance shall be deemed to satisfy the requirements described in this Article 25. Tenant agrees to execute the Mortgagee Non-Disturbance Agreement, provided the agreement conforms substantially to the agreement attached hereto as Exhibit H. 26. Estoppel Certificate. 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 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. 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. Financial Statements. Within thirty (30) days after Landlord's written 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, -48- 54 (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 internal laws of the State of California. 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. 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. 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, in addition to all other relief awarded. 31. Performance by Landlord. -49- 55 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 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 -50- 56 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. 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 one hundred fifty (150) parking spaces available on a non- -51- 57 exclusive basis, with such spaces to be located at the Development or on adjacent property, in Landlord's discretion, for daily use between 6:00 a.m. (or such earlier time that the parking garage shall open) and 6:00 p.m. (or such later time that the parking garage shall close), by Tenant and Tenant's members. Landlord shall charge Tenant an amount equal to either (i) seventy-five percent (75%) of 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) or (ii) one hundred fifty dollars ($150) per month per space, at Tenant's option, which option shall apply to all such parking spaces and shall be made within fifteen (15) days after request by Landlord and shall be irrevocable. If Tenant elects option (ii) in the preceding sentence, the one hundred fifty dollars ($150) per month per space shall be increased each Lease Year by the CPI Increase (as defined herein); provided, however, that notwithstanding the foregoing, the maximum CPI Increase for any Lease Year shall be four percent (4%). 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 come" 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). Tenant has advised Landlord that Tenant requires an additional 200 parking spaces on a non-exclusive basis in connection with the operation of the Club and so long as this Lease remains in full force 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 use commercially reasonable efforts to secure such additional parking spaces on adjacent property or on properties in the general vicinity of the Building. The foregoing shall not be deemed to be a representation that such additional parking spaces shall be available for use by Tenant and Tenant's members. In the event Landlord shall obtain any or all of such additional parking spaces, Landlord shall charge Tenant an amount equal to the market rate in effect for such spaces, from time to time, (the "FAIR MARKET PARKING RATE"); provided, however, that with respect to any such parking spaces which are located in a property controlled by Landlord or an Affiliate of Landlord, Landlord shall charge Tenant an amount equal to ninety percent (90%) of the Fair Market Parking Rate for such spaces; and provided, further, that if Landlord shall charge any other occupant of the Development a rate for any such spaces, whether or not in a property controlled by Landlord or an Affiliate of Landlord, from time to time, that shall be less than the rate charged Tenant for such spaces, then the rate to Tenant shall be equitably adjusted in light of such difference. 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 San Francisco - Oakland - San Jose, CA. All Items (1982-84=100), or a successor or substitute index reasonably -52- 58 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 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. Agency Requirements. Landlord has submitted to the Redevelopment Agency of the City and County of San Francisco (the "AGENCY") in accordance with that certain Disposition and Development Agreement dated as of July 1,1997, as amended, between the Agency and Landlord (the "DDA"), (i) the Equal Opportunity Program (Attachment No. 13 of the DDA) attached hereto as -53- 59 Exhibit D and (ii) that certain Jobs Memorandum of Understanding between the Agency and Landlord attached hereto as Exhibit E (collectively, the "REQUIREMENTS"). In addition, the DDA requires Landlord to undertake a certain jobs program with respect to the Development as more particularly described in Exhibit F attached hereto (the "JOBS PROGRAM," the Jobs Program and the Requirements are collectively hereinafter referred to as the "AGENCY REQUIREMENTS"). Tenant covenants and agrees to observe and perform all of the terms, covenants, conditions, provisions and agreements in the Agency Requirements (exclusive of item (2) of Section 3 of the DDA) in connection with the performance of all of Tenant's obligations hereunder, including, without limitation, the operation of the Premises, and further covenants and agrees not to do or suffer or permit anything to be done which would result in a breach under the Agency Requirements. 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. 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. -54- 60 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. Tenant covenants and agrees that Tenant shall not 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. 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 -55- 61 IMPROVEMENTS COMPRISING THE REAL PROPERTY IN WHICH THE GOODS, MACHINERY, EQUIPMENT, APPLIANCES OR OTHER PERSONAL PROPERTY COVERED HEREBY ARE TO BE LOCATED OR INSTALLED." 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 written 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"). 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. 49. Default by Landlord. -56- 62 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 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 -57- 63 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. 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 G attached hereto which is acceptable to Landlord. -58- 64 54. Condition Precedent. Landlord and Tenant shall each have the right to terminate this Lease on thirty (30) days' written notice to the other party (without penalty) if Landlord shall not have closed upon additional financing for the construction of the Improvements and other portions of the Development (all such approvals and terms to be acceptable to Landlord in its sole and absolute discretion) not later than December 31, 1998 ("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 the Improvements and 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. 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, 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 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. 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 -59- 65 and are not separately transferable or assignable other than in connection with an assignment or subletting permitted by this Lease. -60- 66 IN WITNESS WHEREOF, the parties have executed this Lease as of the date first above written. LANDLORD: CB-1 ENTERTAINMENT PARTNERS LP, a California limited partnership By: CB-1 Office Partners LP, a California limited partnership, its general partner By: Millennium/WDG Office Partners LLC, a California limited liability company, its general partner By: Millennium Partners LLC, a New York limited liability company, its managing member By: Millennium Partners Management LLC, a New York limited liability company, its managing member By: Millennium Manger I, Inc., a New York corporation, its managing member By: /s/ Brian Collins ------------------------------- Name: Brian Collins Title: Vice President TENANT: S.F. SPORTS CLUB, INC. By: /s/ John M. Gibbons --------------------------------------------------------------- Name: John M. Gibbons Title: President -61- EX-10.88 27 EXHIBIT 10.88 1 EXHIBIT 10.88 WASHINGTON D.C. LEASE 2 ATHLETIC CLUB LEASE 2200 M Street Washington, D.C. LANDLORD: 2200 M STREET LLC TENANT: WASHINGTON D.C. SPORTS CLUB, INC. DATE: As of March ___, 1999 3 INDEX OF MAJOR DEFINED TERMS
DEFINED TERM PAGE - ------------ ---- AAA 16 Abatement Notice 57 Actual Statement 17 Additional Rent 10 Affiliate 9 All-risk 33 Allowance 1 Annual Base Rent 10 Antennae 59 Assignment Date 46 Assignment Notice 46 Athletic Club Agreement 9 Athletic Club Fee 8 Building 1 Building Improvements 1 CC&R 19 Claims 32 Club 1 Commencement Date 3 Common Area Expenses 11 Common Areas 2 Condominium Association 19 Condominium Documents 19 Control 47 CPI 53 Cure Period 57 Deadline Date 59 Default 42 Depository 39 Development 1 Financial Officer 38 First-class 19 Floor Area 3 Force Majeure 58 Hazardous Materials 20 Hotel Management Agreement 9 Improvements 1 In-Lieu Tax 26
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DEFINED TERM PAGE - ------------ ---- Initial Annual Base Rent Amount 10 Initial Mortgagee Non-Disturbance Agreement 48 Initial Term 3 Land 1 Landlord 1 Landlord Delay 5 Landlord Offer 38 Landlord's Contribution 1 Landlord's First Substantial Completion Estimate Notice 6 Landlord's Insurance 35 Landlord's Second Substantial Completion Estimate Notice 7 Lease 1 Lease Year 7 Minimum Landlord's Work 4 Monthly Base Rent 10 New York Athletic Club Lease 15 Non-Disturbance Agreement 48 Noticed Lender 57 Operating Expenses 11 Option 7 Option Date 7 Option Period 7 Option Periods 7 Options 7 Other Primary Hotel Operator 22 Partial Taking 41 Person 47 Premises 1 Primary Hotel 8 Primary Hotel Bill 8 Primary Hotel Guests 8 Prime Rate 43 Property 2 real property taxes 26 Receipts Tax 26 Rent 10 Ritz Carlton Standard 22 Scheduled Completion Date 3 Secured Lender 40 Senior Interest Holders 48 Senior Interests 48 Signage Approval Factors 56 Similar Premises 34 Substantial Taking 41
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DEFINED TERM PAGE - ------------ ---- Substantially Complete 4 Tax Year 24 Taxes 24 Temporary Closures 42 Tenant 1 Tenant Acceptance Notice 38 Tenant Delay 4 Tenant Installation 59 Tenant Revision 5 Tenant Termination Costs 38 Tenant's Insurance Share 40 Tenant's Share 15 Tenant's Work 3 Term 7 Termination Notice 57 Total Taking 41 Trade Fixtures 2 Unexpired Lease Term 38 Uninsured Contribution Amount 37 Work Letter 1
iii 6 ATHLETIC CLUB LEASE 2200 M Street Washington, D.C. THIS LEASE (this "LEASE") is made as of the ___ day of March, 1999, by and between 2200 M STREET LLC, a Delaware limited liability company ("LANDLORD") and WASHINGTON D.C. SPORTS CLUB, INC., a Delaware corporation ("TENANT"). 1. Premises and Common Areas. 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. Construction of Premises. 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 7 the right to remove any Trade Fixtures until Tenant shall cure any Default (as defined 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." 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. 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. 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: 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 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 -2- 8 would materially hinder or obstruct Tenant's ability to conduct business from the Premises. 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 District of Columbia 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. -3- 9 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 fourth (4th) 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 -4- 10 such delay by the end of the second (2nd) day following receipt of Landlord's notice of any such delay; or (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 -5- 11 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 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 fourth (4th) 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 -6- 12 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 fourth (4th) floor of the Building is installed, provided that if Tenant 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. 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 -7- 13 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 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. Hotel Guests. Tenant shall permit room guests of the to-be constructed hotel in the Development, currently contemplated to be operated as a Ritz Carlton Hotel (such hotel (which, for purposes of this Lease, shall include any extended stay or time share facilities -8- 14 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 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. 0.4 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 -9- 15 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 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. 0.5 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. 0.6 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: -10- 16 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 Three Million and 00/100 Dollars ($3,000,000.00) 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 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/Washington, D.C.," 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/Washington, D.C." 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. 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 -11- 17 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 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 -12- 18 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. 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). 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: the cost of capital expenditures except for those specifically described in Section 7; 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); costs incurred to the extent that such costs are reimbursed by insurance; any ground lease or master lease payments; 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 -13- 19 disposition of all or any part of the Development or any interest therein and (3) any financing or refinancing with respect to the Development; 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; 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); 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; costs paid to Affiliates of Landlord in excess of market rates; 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; 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; Landlord's general overhead and general administrative expenses; 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); 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); costs to repair latent or patent defects with respect to the Development or Landlord's Work; costs incurred due to the violation by Landlord or any other occupant of the Development of the terms or conditions of any lease; costs arising from or relating to the presence of Hazardous Materials (as defined herein) in or about the Development; -14- 20 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); insurance premiums, but only if and to the extent Landlord is reimbursed for the cost thereof by Landlord's insurers; bad debt expenses resulting from Landlord's negligence or improper acts; costs of charitable or political contributions and fees and dues paid to trade associations (other than as provided in Section 7.1 hereof); any cost payable by Tenant pursuant to other Sections of this Lease; and any Operating Expenses or Common Area Expenses, as applicable, reasonably allocable to any parking structure located within the Development. 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 -15- 21 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 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 Washington, D.C. 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 -16- 22 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 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. 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 -17- 23 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 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. 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 -18- 24 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. 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. 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 $1,000,000 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. Permitted Use. 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, 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 -19- 25 Landlord to any then current tenant or any future tenant or occupant of the Development of which Landlord has advised Tenant. Compliance with Laws. 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 declaration, 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 (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 obligations hereunder. 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. 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. -20- 26 Tenant shall not commit or suffer to be committed any waste in or upon the Premises. 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 are being conducted in the Premises, as permitted under this Lease. Hazardous Materials. 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, 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. 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 -21- 27 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. 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) if the operator of the Primary Hotel is the Ritz Carlton or an Affiliate thereof, in a manner consistent with the typical standard of operation with respect thereto of the Ritz Carlton in the United States as of the date hereof (the "RITZ CARLTON STANDARD") or otherwise in a manner consistent with the typical standard of operation with respect thereto of the then operator of the Primary Hotel in the United States (the "OTHER PRIMARY HOTEL OPERATOR"); provided, however, that with respect to the standard of operation of an Other Primary Hotel Operator any such standard of operation shall not increase (except to a de minimis extent) the cost and expense to Tenant (which will not be recouped by Tenant) to provide spa services in the Premises and/or operate a beauty salon in the Premises beyond that which Tenant would have incurred in connection with the Ritz Carlton Standard and Tenant shall not be required to remodel and/or reformat the portions of the Premises providing spa services and/or being operated as a beauty salon as a direct result of the conversion from the Ritz Carlton Standard to the standard of operation of an Other Primary Hotel Operator. 9. Notices. -22- 28 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 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 -23- 29 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. 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 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 -24- 30 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. 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 -25- 31 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. Trade Fixtures. Tenant shall be liable for and shall pay, before delinquency, all taxes levied against Trade Fixtures. 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 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. -26- 32 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. 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 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, -27- 33 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. 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. 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. 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 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 -28- 34 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. 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 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. 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 -29- 35 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. 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. 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 -30- 36 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 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. 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 -31- 37 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) condenser 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 Tenant's use and possession of the Premises, or any part thereof, or give Tenant any right to terminate this Lease. 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. 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 -32- 38 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. 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 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. 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. -33- 39 20. Insurance. 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: 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. 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 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 Washington, D.C., or other first-class mixed-use buildings or premises having business operations of a nature and character -34- 40 substantially similar to the nature and character of the business operations being conducted at the Premises, and being located in Washington, D.C. Workers' Compensation. Workers' Compensation and Employer's Liability insurance (as required by state law). 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. 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. 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 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. 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 -35- 41 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. 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-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. 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. 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. -36- 42 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. (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 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 -37- 43 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 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 -38- 44 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 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. Depository. The "DEPOSITORY" shall be a bank or trust company authorized to do business in the District of Columbia, 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, -39- 45 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 expenses, Landlord and Tenant shall share equally the fees and expenses of the Depository. 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. -40- 46 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. 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 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. -41- 47 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. 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 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. -42- 48 Waiver. Landlord and Tenant each hereby waive any statutory rights of termination which may arise by reason of a taking. 23. Defaults and Remedies. Defaults. The occurrence of any one or more of the following events shall constitute a default hereunder by Tenant ("DEFAULT"): 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). 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; 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; (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 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 -43- 49 assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within 120 days; or 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. 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: the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus 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 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 damages which may be suffered by the other as a result of a default by Landlord or default by Tenant under this Lease. -44- 50 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) complimentary 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. 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 -45- 51 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. 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. 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. -46- 52 Landlord's Consent. Except as otherwise expressly provided in the last sentence of Section 8.1 hereof and in Section 24.3 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. Notice. Subject to the provisions of Article 46 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. 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 -47- 53 obligations and performance of this Lease and agree to be 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. 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 -48- 54 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 (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. 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 -49- 55 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 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. 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. 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 District of Columbia (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 -50- 56 "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. 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. -51- 57 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 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 -52- 58 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. 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 -53- 59 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 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 Washington, D.C. -54- 60 - - MD - VA, 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 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. -55- 61 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. 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, -56- 62 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. Tenant covenants and agrees that Tenant shall not 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. 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." 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 -57- 63 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"). 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. 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 -58- 64 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 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 -59- 65 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. 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 March 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. 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 -60- 66 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, 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. 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. -61- 67 IN WITNESS WHEREOF, the parties have executed this Lease as of the date first above written. LANDLORD: 2200 M STREET LLC By: Millennium Partners LLC, its manager By: Millennium Partners Management LLC, its manager By: Millennium Manager I, Inc., its manager By: /s/ Brian Collins ------------------------------- Name: Brian Collins Title: Vice President TENANT: WASHINGTON D.C. SPORTS CLUB, INC. By: /s/ John M. Gibbons ------------------------------- Name: John M. Gibbons Title: President -62- EX-21.1 28 EXHIBIT 21.1 1 EXHIBIT 21.1 SUBSIDIARIES 2 THE SPORTS CLUB COMPANY, INC. (A DELAWARE CORPORATION) SUBSIDIARIES
SUBSIDIARY FORM STATE OWNER OWNERSHIP - ---------- ---- ----- ----- --------- TVE, Inc. (Inactive) Corporation California The Sports Club Company, Inc. 100.00% Century City Spectrum, Inc. Corporation California The Sports Club Company, Inc. 100.00% The Sports Connection Holding Company Corporation California The Sports Club Company, Inc. 100.00% The Spectrum Club Company, Inc. Corporation California The Sports Club Company, Inc. 100.00% Sports Club, Inc. of California Corporation California The Sports Club Company, Inc. 100.00% Pontius Realty, Inc. Corporation California The Sports Club Company, Inc. 100.00% Irvine Sports Club, Inc. Corporation California The Sports Club Company, Inc. 100.00% The SportsMed Company, Inc. Corporation California The Sports Club Company, Inc. 100.00% SCC Sports Club, Inc. (Inactive) Corporation Texas The Sports Club Company, Inc. 100.00% L.A./Irvine Sports Clubs, Ltd. Partnership California Sports Club, Inc. of California 50.10% Talla New York, Inc. Corporation New York Sports Club, Inc. of California 100.00% Reebok-Sports Club/NY Partnership New York Talla New York, Inc. 60.00% El Segundo-TDC, Ltd. Partnership California The Spectrum Club Company, 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 California The Spectrum Club Company, Inc. 43.73% El Segundo-TDC, Ltd. 6.27% Green Valley Spectrum Club, Inc. Corporation Nevada The Sports Club Company, Inc. 100.00% SF Sports Club, Inc. Corporation Delaware The Sports Club Company, Inc. 100.00% Washington D.C. Sports Club, Inc. Corporation Delaware The Sports Club Company, Inc. 100.00% HFA Services, Inc. Corporation Delaware The SportsMed Company, Inc. 100.00% Sepulveda Realty and Development Co. Inc. Corporation California The Sports Club Company, Inc. 100.00% Spectrum Club Anaheim Corporation California The Sports Club Company, Inc. 100.00% Spectrum Liquidating Corp. Corporation California The Sports Club Company, Inc. 100.00%
EX-23.1 29 EXHIBIT 23.1 1 EXHIBIT 23.1 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 19, 1999, relating to the balance sheets of The Sports Club Company, Inc. as of December 31, 1997 and 1998, and the related statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of The Sports Club Company, Inc. KPMG LLP Los Angeles, California March 23, 1999 EX-27 30 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 2,233 0 2,695 215 1,527 7,043 147,789 12,520 163,757 26,199 0 0 0 209 104,330 163,757 81,923 81,923 56,746 56,746 13,838 0 1,629 10,126 3,971 6,155 0 2,173 0 3,982 .33 .33
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