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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ / Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended
/X/ Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from June 1, 1998 to December 31, 1998
Commission file number: 333-40907
TOWN SPORTS INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
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NEW YORK 13-2749906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
(212)-246-6700
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
The aggregate market value of Common Stock held by non-affiliates of the
registrant: Not applicable
As of March 15, 1999, there were 1,015,714 shares of Class A Common Stock of
the Company outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits filed with the Registrant's Registration Statements on Form
S-1 and Form S-4 (File Nos. 333-61439 and 333-40907, as amended) are
incorporated by reference into Part III of this Report on Form 10-K.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
1. Business.......................................................................................... 2
2. Properties........................................................................................ 10
3. Legal Proceedings................................................................................. 12
4. Submission of Matters to a Vote of Security Holders............................................... 13
PART II
5. Market for Registrant's Common Stock and Related Shareholder Matters.............................. 13
6. Selected Financial Data........................................................................... 14
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 16
7A. Quantitative and Qualitative Disclosures About Market Risks....................................... 24
8. Financial Statements and Supplementary Data....................................................... 24
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 24
PART III
10. Directors and Executive Officers of the Registrant................................................ 24
11. Executive Compensation............................................................................ 26
12. Security Ownership of Certain Beneficial Owners and Management.................................... 30
13. Certain Relationships and Related Transactions.................................................... 31
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................. 35
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TOWN SPORTS INTERNATIONAL, INC.
PART I
ITEM 1. BUSINESS
GENERAL
Town Sports International, Inc. (collectively with its subsidiaries, "Town
Sports" or the "Company") is one of the two leading owners and operators of
fitness clubs in the Northeast and Mid-Atlantic regions of the United States. As
of December 31, 1998, the Company operated 69 clubs that collectively served
approximately 179,000 members. The Company develops clusters of clubs to serve
densely populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income of $50,000.
The Company's goal is to develop the premier health club network in each of
the major metropolitan regions in which it operates. Management believes that
clustering clubs allows the Company to achieve strategic operating advantages
that enhance its ability to achieve this goal. When entering new regions, the
Company develops its clusters by initially opening or acquiring clubs located in
the more central urban markets of the region and then branching out from these
urban centers to suburbs and ancillary communities. Capitalizing on this
clustering of clubs, as of December 31, 1998, approximately 45% of the Company's
members participated in a membership plan that allows unlimited access to all of
the Company's clubs for a higher membership fee.
The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its New York Sports Club ("NYSC")
brand name. The Company is the largest fitness club operator in Manhattan with
23 locations and operates a total of 55 clubs under the NYSC name within a
defined radius of New York City. The Company is in the process of more fully
developing clusters within a smaller radius surrounding Washington, DC under its
Washington Sports Club ("WSC") brand name and has begun establishing similar
clusters surrounding Boston and Philadelphia under its Boston Sports Club
("BSC") and Philadelphia Sports Club ("PSC") brand names, respectively. The
Company employs localized brand names for its clubs to create an image and
atmosphere consistent with the local community and to foster recognition as a
local network of quality fitness clubs rather than a national chain.
The Company changed its fiscal year end from May 31 to December 31, which
resulted in a transition period of seven months ended December 31, 1998. The
decision to change the fiscal year was made for more convenience in both
internal and external communications.
The Company has experienced significant growth over the past several years
through a combination of (i) acquiring existing, privately owned, single and
multi-club businesses, and (ii) developing and opening "greenfield" club
locations. From June 1, 1993 to December 31, 1998, the Company acquired 35
existing clubs, opened 16 greenfield clubs, sold one club and closed one club at
the expiration of its lease to increase its total clubs under operation from 20
to 69. The Company plans to acquire or open at least 20 more clubs prior to
December 31, 1999. The Company has achieved revenue growth over the five year
and seven month period ended December 31, 1998 at a compound annual rate of
approximately 38.6% from $24.9 million for the year ended May 31, 1994 to $111.0
million for the twelve months ended December 31, 1998. This growth has been
driven not only by the addition of acquired and greenfield club locations, but
also through comparable club revenue growth, which has ranged from 10.9% to
27.3% for the five year and seven month period ended December 31, 1998 and was
25.5% for the twelve months ended December 31, 1998. Comparable club revenue
growth has enabled the Company to increase revenue per weighted average club
over the five year and seven month period ended December 31, 1998. Revenue per
weighted average club has risen from $1.8 million in fiscal 1994 to $2.1 million
for the
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twelve months ended December 31, 1998. Based on the Company's historical
experience, a new club tends to achieve significant increases in revenues during
its first three years of operation as it reaches maturity. Because clubs
experience little incremental cost associated with such revenue increases, the
Company realizes a greater proportionate increase in profitability. This
operating leverage has allowed it to achieve EBITDA growth over the five year
and seven month period ended December 31, 1998 at a compound annual rate of
approximately 45.8% from $3.6 million for the year ended May 31, 1994 to $20.3
million for the twelve month period ended December 31, 1998. The Company's rate
of EBITDA growth from fiscal 1997 to the twelve month period ended December 31,
1998 accelerated to 128.2%
The Company's model club ranges in size from approximately 15,000 to 25,000
square feet and averages approximately 21,000 square feet. Clubs typically have
an open space to accommodate cardiovascular and strength-training exercise, as
well as special purpose rooms to accommodate aerobic class instruction and other
exercise programs. Locker rooms generally include a sauna and steam room.
Management seeks to provide a broad array of high quality exercise programs and
equipment that is both popular and effective, while reinforcing the quality
exercise experience the Company strives to make available to its customers.
While the Company does not generally build locations with amenities such as
swimming pools or racquet and basketball courts, the Company does strive to
establish at least one flagship club that has such amenities in each of its
markets. Management believes that it is generally more economical to acquire
clubs with such amenities than to develop them as greenfield clubs.
Management engages in a detailed site analysis and selection process based
upon information provided by the Company's proprietary development software to
identify potential target areas for additional clubs based upon population
demographics, traffic and commuting patterns, availability of sites and
competitive market information. In addition to the Company's existing 69 clubs
under operation and the 15 sites for which the Company has entered into lease
commitments, management has identified approximately 125 target areas in which
it plans to add clubs under the brand names NYSC, WSC, BSC or PSC. Management
estimates that it will identify approximately 50 additional target areas in
which to add clubs under these brand names. Once the Company begins to approach
saturation of these regions, management will explore expansion opportunities in
contiguous regions along the East Coast and the Mid-Atlantic. Since its
inception, the Company has never closed a club prior to the expiration of a
lease and has closed only one club at the expiration of a lease.
The Company possesses an experienced management team, the top five
executives of which have been working together at the Company since 1990.
Management believes that it has the depth, experience and motivation to manage
the Company's internal and external growth, and that the Company has put in
place the infrastructure and systems to manage effectively the Company's planned
expansion. Management believes that the presence of such infrastructure will
enable the Company over time to leverage certain fixed cost aspects of overhead
to realize increased EBITDA margins as the Company continues to expand its club
base. This operating leverage has already helped the Company to increase its
EBITDA margin by more than 85% to approximately 18.1% for the twelve month
period ended December 31, 1998 compared to approximately 9.7% in fiscal 1997.
INDUSTRY OVERVIEW
According to published industry sources, total fitness club industry
revenues have increased at a compound annual rate of approximately 8.6% from
$5.5 billion in 1991 to $9.0 billion in 1997. Over the same period of time,
fitness club memberships have increased at a compound annual rate of 5.1% from
16.7 million to 22.5 million and have increased over 50% since 1987. These
statistics imply that average revenue per member has grown at a compound annual
rate of 3.3% for the industry since 1991. Membership and revenue growth have
dramatically outpaced the growth of fitness clubs, which has grown at a compound
annual rate of only 2.1% to approximately 13,800 in 1997 from approximately
12,150 in 1991. Management believes that fitness clubs, on average, have
experienced significant excess capacity historically. Only more recently has the
industry as a whole experienced the level of membership
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and revenue per club to realize the benefits of the inherent operating leverage
in the industry. As a result, fitness club growth accelerated to 5.0% in 1997
and the top 100 fitness club companies planned to open approximately 315 clubs
in 1998, in the aggregate.
Management believes that the growth in fitness club memberships is
attributable to several factors. Americans are focused on achieving a healthier,
more active lifestyle. Of the factors members consider very important in their
decision to join a fitness club, the most commonly mentioned is health, closely
followed by appearance related factors including muscle tone, looking better and
weight control. Management believes that the increased emphasis on appearance
and wellness in the media has heightened the focus on self image and fitness and
will continue to do so. Management also believes that fitness clubs provide a
more convenient venue for exercise than outdoor activities, particularly in
densely populated metropolitan areas. According to published industry reports,
convenience is an important factor in choosing a fitness club.
According to industry sources, the four major trends that are driving
changes in the health and fitness industry include: (i) an influx of
institutional capital investment is leading a transformation of club ownership
from private to public; (ii) large operators are beginning to build regional and
national platforms to consolidate the industry and, in turn, are providing
liquidity for many small operators; (iii) the aging of the American population
is creating an awareness of and a need for healthy living and physical fitness;
(iv) insurers are beginning to partner with corporations to promote preventative
healthcare programs such as fitness clubs memberships.
Across the industry, monthly membership dues have averaged between $54.00
and $58.00 per month for a single adult from 1994 through 1997. Around this
average monthly fee, management believes the industry can be segregated into
three tiers based upon price, service and quality: (i) an upper tier consisting
of clubs with monthly membership dues averaging in excess of $80.00 per month;
(ii) a middle tier consisting of clubs with monthly membership dues averaging
between $80.00 and $40.00 per month; and (ii) a lower tier consisting of clubs
with monthly membership dues averaging less than $40.00 per month. The Company
competes in the middle tier in terms of pricing and is positioned toward the
upper end of this tier. Based upon the quality and service the Company provides
its members, management believes that the Company provides an attractive value
to its members at the monthly membership dues it charges.
The fitness club industry is highly fragmented. In 1997, the ten largest
operators accounted for less than 8.0% of total club ownership and approximately
17.2% of total industry revenues. In addition, approximately 65.0% of the total
industry clubs are operated by single club operators. Based upon this data,
management believes that considerable consolidation will occur in the industry.
According to published industry data, excluding the Company, the ten largest
industry participants planned to acquire approximately 50 clubs in 1998. The
Company expects to play a significant role as a consolidator on a regional
basis.
MARKETING
The Company's marketing campaign is directed by its in-house media
department which is headed by the Chief Operating Officer. This team develops
advertising strategies to convey each of the Company's regionally branded
networks as the premier network of fitness clubs in that region. Advertisements
are designed to highlight the consistent quality and high value-to-price ratio
management believes the Company provides through a combination of its membership
programs, club facilities and personnel. The media team's goal is to achieve
broad awareness of the Company's regional brand names primarily through
newspaper, billboard, radio, television and direct mail advertising. Management
believes that the Company's clustering of clubs creates economies in its
marketing and advertising strategy that increase the efficiency and
effectiveness of these campaigns.
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Advertisements generally feature creative slogans that communicate the
serious approach the Company takes toward fitness in a provocative and/or
humorous tone, rather than pictures of the Company's clubs or members
exercising. The Company does not advertise discounts on monthly membership dues.
Promotional marketing campaigns will typically feature opportunities to
participate in value-added services such as personal training for a limited time
at a discount to the standard rate. On occasion, the Company will also offer
reduced initiation fees to encourage enrollment. Additionally, the Company
frequently sponsors member referral incentive programs. Approximately one-third
of the Company's new members cite a referral from an existing member as a reason
for joining. Such incentive programs include a free month of membership,
personal training sessions, sports equipment such as a free gym bag or a gift
certificate for other in-club purchases. In addition, the Company maintains four
Internet sites that provide information about club locations, program offerings
and on-line promotions.
The Company also engages in public relations and special events to promote
its image in the local communities. Management believes that these public
relations efforts enhance the Company's image and the image of its local brand
names in the communities in which it operates. The Company also seeks to build
its community image through co-operative advertising campaigns with local
sporting goods retailers.
SALES
Sales of new memberships are generally handled at the club level. The
Company employs approximately 175 "in-club" membership consultants who are
responsible for new membership sales. Each club generally has two full-time and
one part-time membership consultants. These consultants report both to the
general manager of the club as well as to one of the Company's seven area sales
managers, who in turn report to the Company's Vice President Sales. Membership
consultants' compensation consists of a base salary plus commission. Sales
commissions range from $45.00 to $65.00 per new member enrolled. The Company
provides additional incentive-based compensation in the form of bonuses
contingent upon individual, club and Company-wide enrollment goals. Membership
consultants must successfully complete a three-month, in-house training program
through which they learn the Company's sales strategy. In making a sales
presentation, membership consultants emphasize: (i) the proximity of its clubs
to concentrated commercial and residential areas convenient to where target
members live and work; (ii) the lack of a long-term obligation on the part of
the enrollee; (iii) the price value relationship of a Town Sports membership;
and (iv) access to value-added services. All of the Company's area sales
managers have been promoted from within the Company to their current positions.
Management believes that providing employees with opportunities for career
advancement is essential to the Company's ability to attract and retain
qualified sales personnel. The Company also employs a full-time corporate sales
manager whose sole responsibility is to solicit group memberships through senior
level corporate contacts.
Management believes that clustering clubs allows the Company to sell
memberships based upon the opportunity for members to utilize multiple club
locations to differing degrees. The Company has streamlined its membership
structure to simplify the sales process. In addition, the proprietary
centralized computer software utilized by the Company ensures consistency of
pricing and controls enrollment processing at the club level. The Company offers
three principal types of memberships:
THE PASSPORT MEMBERSHIP, priced from $74.00 to $79.00 per month, is the
Company's highest priced membership and entitles members to use any Town
Sports club at any time. This membership is held by approximately 45.0% of
members.
THE GOLD MEMBERSHIP, priced from $49.00 to $74.00 per month based on the
market area of enrollment, enables members to use a specific club, or a
group of specific clubs, at any time and any Town Sports club during
off-peak times. This membership is held by over 53.5% of members.
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THE OFF-PEAK MEMBERSHIP, priced from $44.00 to $66.00 per month, is the
least expensive membership, and allows members to use any Town Sports club
only during off-peak times. This membership is held by approximately 1.5% of
members.
By clustering a group of clubs in a geographic area, the value of Company
memberships is enhanced by the ability to offer Passport Memberships, which
allow the member to use any Company club at any time. Approximately 45.0% of all
members choose the Passport Membership option. Management believes the
popularity of the Passport Membership results from the broader privileges and
greater convenience this membership plan provides through the opportunity for
members to access club facilities near to both their homes and offices.
Management also believes that Passport Memberships will increase as a percentage
of total memberships as the Company continues to build its clusters in the
Washington, DC, Boston and Philadelphia regions. The Boston and Philadelphia
regions, in particular, have not yet developed the critical mass to support
substantial sales of Passport Memberships. The Company's clustering strategy
also allows it to provide access to special facilities such as squash, tennis,
basketball and racquetball courts and swimming pools through flagship locations
strategically located in key target areas without offering such facilities in
every location.
In joining a club, a new member signs a membership agreement which obligates
the member to pay a one-time initiation fee and monthly dues on an ongoing
basis. For the twelve months ended December 31, 1998, initiation fees averaged
$105.13. Monthly membership dues averaged approximately $64.47 per month during
that same period. The Company collects approximately 89.3% of all monthly
membership dues through Electronic Funds Transfer "EFT". Substantially all other
monthly membership dues are paid in advance. EFT members can generally cancel
memberships at any time upon 30 days notice. Based upon detailed statistical
studies of the membership base at the Company's mature clubs, however, the
average length of the Company's memberships is approximately 24 months. The
membership agreement calls for monthly dues to be collected by EFT based on
credit card or bank account debit authorization contained in the agreement.
Management believes that its EFT program of monthly dues collection provides a
predictable and stable cash flow for the Company, eliminates the traditional
accounts receivable function, and minimizes bad-debt write-offs while providing
a significant competitive advantage in terms of the sales process, dues
collection, working capital management and membership retention. In addition, it
enables the Company to increase its dues in an efficient and consistent manner.
During the first week of each month, the Company receives the EFT dues for that
month by wire transfers initiated by Checkfree Corporation. Discrepancies and
insufficient funds incidents are researched and resolved by an in-house staff
that numbered ten at December 31, 1998. For the three years and seven months
ended December 31, 1998, the Company experienced an average of uncollected EFT
receivables of less than 1.2%.
The Company's total EFT revenue has increased by $5.9 million per month from
$2.4 million in May, 1995 to over $8.3 million in December 1998. While the
Company strongly encourages monthly EFT memberships, approximately 10.7% of the
Company's members (often corporate group members) purchase paid-in-full
memberships for a one year term. Annually the Company raises its monthly dues by
between 1% and 3%.
CLUB FORMAT AND LOCATIONS
The Company's clubs are typically located in well-established, higher-income
residential, commercial or mixed urban neighborhoods within major metropolitan
areas which are capable of supporting the development of a cluster of clubs.
Fitness clubs generally have relatively high "retail" visibility, and close
proximity to transportation. In the New York City and Washington, DC markets,
the Company has created clusters of clubs in urban areas and their commuter
suburbs in accordance with the Company's operating strategy of offering its
target members the convenience of multiple locations close to where they live
and work, reciprocal use privileges and standardized facilities and services.
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The Company's clubs generally range in size from 15,000 to 25,000 square
feet and averages approximately 21,000 square feet. Membership for each club
ranges from 2,500 to 4,500 members at maturity. Although club members represent
a cross-section of the population in a given geographic market, the Company's
typical member is college educated, between the ages of 20 and 44 and earns an
annual income of $50,000.
The Company's facilities include state-of-the-art cardiovascular equipment,
including Lifecycles, StairMasters, treadmills, and elliptical motion machines;
strength equipment and free weights, including Cybex, Icarian, Nautilus and
Hammer Strength equipment; group exercise and cycling studio(s); Cardio-Theater
entertainment systems; locker rooms, including shower facilities, towel service,
and other amenities such as saunas and steamrooms; babysitting, and a retail
shop. Personal training services are offered at all locations and massage is
offered at most clubs, each at an additional charge. Additional services and
facilities such as physical therapy programs, swimming pools, basketball,
tennis, racquetball and/or squash courts and climbing walls are available in
flagship locations.
CLUB OPERATIONS
The Company emphasizes consistency and quality in all of its club
operations, including:
MANAGEMENT. The Company believes that its success is largely dependent on
the selection and training of its staff and management. The Company's management
structure is designed, therefore, to support the professional development of
highly motivated managers who will execute the Company's directives and support
growth.
Corporate departments are responsible for each area of club services, such
as exercise classes, fitness programming, personal training, facility and
equipment maintenance, housekeeping and laundry. This centralization allows
local general managers at each club to focus on customer service, club staffing
and providing a high quality exercise experience. General managers are
responsible for the day-to-day management of each club, and directly report to
area managers, who liaise with corporate staff ensuring consistent service at
all locations.
The Company provides performance-based incentives to its management. Senior
management compensation, for example, is tied to overall Company performance.
Departmental directors, area managers and general managers have bonuses tied to
financial and member retention targets for a particular club or group of clubs.
PERSONAL TRAINING. All of the Company's fitness clubs offer one-on-one
personal training, which is sold by the single session or in multi-session
packages, to assist the Company's members with their daily workouts. Personal
trainers are divided into three tiers: House Trainers, Professional Trainers and
Master Trainers. House Trainers are stationed on a club's fitness floor to
provide orientations to new members and to assist with the operation of
equipment. House Trainers who exhibit superior skills receive a commission on
personal training sessions. House Trainers become Professional Trainers once
they have completed the Company's advanced certification program. As a
Professional Trainer, the employee is entitled to a higher commission on
personal training. Finally, trainers, who have obtained national certification
and have developed an established client base, are permitted to collect the
highest commission and to move from club to club to service club members as a
Master Trainer. The Company believes that its personal training programs provide
valuable guidance to its members and a significant source of incremental revenue
from value-added services for the Company.
GROUP FITNESS. The Company's commitment to providing a quality workout
experience to its members extends to the employment of program instructors, who
teach aerobics, cycling, strength conditioning, boxing, yoga and step aerobics
classes, among others. The Company's clustering strategy enables it to staff
program instructors and professional personal trainers at more than one club. As
a result, the Company can vary a given club's instructors, while providing
instructors sufficient classes to
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effectively and economically treat these instructors as full-time employees. The
Company offers its employees various benefits including; health, dental,
disability, insurance and a 401(k) plan. Management believes the availability of
employee benefits provides the Company a strategic advantage in attracting and
retaining quality program instructors and professional personal trainers and
that this strategic advantage in turn translates into a more consistent and
higher quality workout experience for those members who utilize such services.
All program instructors report to a centralized management structure, headed by
the Director of Programming who is responsible for overseeing auditions and
providing in-house training to keep instructors current in the latest training
techniques and program offerings.
PROPRIETARY CENTRALIZED INFORMATION SYSTEMS
The Company has developed a proprietary system to track and analyze sales,
leads, and membership statistics which, in conjunction with its other systems,
allows the Company to track the frequency of member workouts, multi-club
utilization, value-added services and demographic profiles by member, which
enables the Company to develop targeted direct marketing programs and to modify
its broadcast and print advertising to improve consumer response. These systems
also assist the Company in evaluating staffing needs and program offerings. In
addition, the Company relies on certain data gathered through its information
systems to assist in the identification of new markets for clubs and site
selection within those markets.
PROPRIETARY SOFTWARE AND INTELLECTUAL PROPERTY
Management believes it has been an industry leader in the use of computer
technology since the mid-1980's. The Company uses information technology in
virtually every area of the business, including business development, sales and
marketing, staffing and other operational systems. The Company has begun a
multi-year information technology project by which it has implemented, among
other things: (i) the industry's first multi-site online contracting system
designed to control membership pricing and streamline the creation, processing
and management of the Company's sales contracts for new members; (ii) a sales
compensation system; (iii) a system that automatically updates existing member
records; (iv) extensive club site development databases; (v) a class exercise
scheduling and payroll system; and (vi) ) a personal training revenue tracking
and payroll system, as part of a larger fitness programming project. Other
elements of this project will include the development and implementation of: (i)
a computerized photo and card-swipe system for member check-in; and (ii) a kiosk
system to be deployed throughout the Town Sports network, which will provide a
range of information and content centered around fitness and services provided
by the Company. Management believes that its information management systems,
which are proprietary in many respects, produce a substantial competitive
advantage.
The Company has registered, and is in the process of registering, various
trademarks and service marks with the U.S. Patent and Trademark Office,
including NEW YORK SPORTS CLUBS, WASHINGTON SPORTS CLUBS, BOSTON SPORTS CLUBS,
PHILADELPHIA SPORTS CLUBS, TSI AND TOWN SPORTS INTERNATIONAL, INC.
COMPETITION
The fitness club industry is highly competitive. The Company competes with
other fitness clubs, physical fitness and recreational facilities established by
local governments and hospitals and by businesses for their employees, amenity
and condominium clubs, the YMCA and similar organizations and, to a certain
extent, with racquet and tennis and other athletic clubs, country clubs, weight
reducing salons and the home-use fitness equipment industry. The Company also
competes with other entertainment and retail businesses for the discretionary
income of its target markets. There can be no assurance that the Company will be
able to compete effectively in the future in the markets in which it operates.
Competitors, which may include companies which are larger and have greater
resources than the
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Company, may enter these markets to the detriment of the Company. These
competitive conditions may limit the Company's ability to increase dues without
a material loss in membership, attract new members and attract and retain
qualified personnel. Additionally, consolidation in the fitness club industry
could result in increased competition among participants, particularly large
multi-facility operators that are able to compete for attractive acquisition
candidates, thereby increasing costs associated with expansion through both
acquisitions, and lease negotiation and real estate availability for
greenfields.
Management believes that its market leadership, experience and operating
efficiencies enable it to provide the consumer with a superior product in terms
of convenience, quality and affordability. Management believes that there are
significant barriers to entry in its urban markets, including restrictive zoning
laws, lengthy permit processes and a shortage of appropriate real estate, which
could discourage any large competitor from attempting to open a chain of clubs
in these markets. However, such a competitor could enter these markets more
easily through one or a series of acquisitions.
EMPLOYEES
At December 31, 1998, the Company had approximately 3,650 employees, of
which approximately 1,200 were employed full-time. Approximately 150 employees
were corporate personnel working in the Manhattan or the Washington, DC offices.
The Company is not a party to any collective bargaining agreement with its
employees. The Company has never experienced any significant labor shortages nor
had any difficulty in obtaining adequate replacements for departing employees
and considers its relations with its employees to be good. Management believes
that it offers its employees benefits (including health, dental, disability,
insurance and a 401(k) plan) which are superior to those generally offered by
its competitors.
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulation at the federal, state and, in some cases, local levels. State and
local consumer protection laws and regulations govern the Company's advertising,
sales and other trade practices.
Statutes and regulations affecting the fitness industry have been enacted in
states in which the Company conducts business; many other states into which the
Company may expand have adopted 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 establish maximum prices for membership contracts and limitations on the
term of contracts. In addition, the Company is subject to numerous other types
of federal and state regulations governing the sale of memberships. These laws
and regulations are subject to varying interpretations by a number of state and
federal enforcement agencies and the courts. The Company maintains internal
review procedures in order to comply with these requirements, and believes that
its activities are in substantial compliance with all applicable statutes, rules
and decisions.
Under so-called state "cooling-off" statutes, a member has the right to
cancel his or her membership for a period of three to ten days (depending on the
applicable state law) and, in such event, is entitled to a refund of any
initiation fee paid. In addition, the Company's membership contracts provide
that a member may cancel his or her membership at any time for medical reasons
or relocation a certain distance from the nearest club. The specific procedures
for cancellation in these circumstances vary due to differing state laws. In
each instance, the canceling member is entitled to a refund of prepaid amounts
only. Furthermore, where permitted by law, a cancellation fee is due to the
Company upon cancellation and the Company may offset such amount against any
refunds owed.
9
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K of the Company for the
seven month period ended December 31, 1998 are forward-looking statements,
including, without limitation, statements regarding future financial results and
performance, potential sales revenue and tax benefits. These statements are
subject to various risks and uncertainties, many of which are outside the
control of the Company, including the level of market demand for the Company's
services, competitive pressures, the ability to achieve reductions in operating
costs and to continue to integrate acquisitions, environmental matters, the
application of Federal and state tax laws and regulations, and other specific
factors discussed herein and in other Securities and Exchange Commission filings
by the Company. The information contained herein represents management's best
judgement as of the date hereof based on information currently available;
however, the Company does not intend to update this information to reflect
development or information obtained after the date hereof and disclaims any
legal obligation to the contrary.
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- ----------------------------------- ------------------------------------ -------------------
<S> <C> <C>
NEW YORK SPORTS CLUBS:
1. Manhattan 404 Fifth Avenue January, 1974
2. Manhattan 151 East 86th Street January, 1977
3. Manhattan 61 West 62nd Street July, 1983
4. Manhattan 614 Second Avenue July, 1986
5. Manhattan 30 Cliff Street January, 1990
6. Manhattan 380 Madison Avenue January, 1990
7. Manhattan 151 Reade Street January, 1990
8. Manhattan 1601 Broadway September, 1991
9. Manhattan 50 West 34th Street August, 1992
10. Manhattan 349 East 76th Street April, 1994
11. Manhattan 248 West 80th Street May, 1994
12. Manhattan 502 Park Avenue February, 1995
13. Manhattan 117 Seventh Avenue South March, 1995
14. Manhattan 303 Park Avenue South December, 1995
15. Manhattan 30 Wall Street May, 1996
16. Manhattan 1635 Third Avenue October, 1996
17. Manhattan 575 Lexington Avenue November, 1996
18. Manhattan 278 Eighth Avenue December, 1996
19. Manhattan 200 Madison Avenue February, 1997
20. Manhattan 131 East 31st Street February, 1997
21. Manhattan 2162 Broadway November, 1997
22. Manhattan 633 Third Avenue April, 1998
23. Manhattan 1657 Broadway July, 1998
24. Manhattan 217 Broadway March 1999
25. Manhattan+ 34 West 14th Street Opening 1999
26. Manhattan+ 503-511 Broadway Opening 1999
27. Manhattan+ 23 West 73rd Street Opening 1999
28. Manhattan* 300 West 125th Street Opening 1999
29. Manhattan* Battery Park City Opening 2000
30. Brooklyn, NY 110 Boerum Place October 1985
31. Brooklyn, NY 1736 Shore Parkway June, 1998
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- ----------------------------------- ------------------------------------ -------------------
<S> <C> <C>
32. Queens, NY 69-33 Austin Street, Forest Hills April, 1997
33. Queens, NY 153-67 A Cross Island Parkway June, 1998
34. Staten Island, NY 300 West Service Road June, 1998
35. Great Neck, NY 15 Barstow Road July, 1989
36. Scarsdale, NY 696 White Plains Road October 1995
37. Mamaroneck, NY 124 Palmer Avenue January, 1997
38. White Plains, NY 1 North Broadway September, 1997
39. Croton-on-Hudson, NY 420 South Riverside Drive January, 1998
40. Nanuet, NY 58 Demarest Mill Road May, 1998
41. Larchmont, NY 15 Madison Avenue December, 1998
42. Oceanside, NY+ 2909 Lincoln Avenue Opening 1999
43. Stamford, CT 6 Landmark Square December, 1997
44. Stamford, CT 106 Commerce Road January, 1998
45. Danbury, CT 38 Mill Plain Road January, 1998
46. Stamford, CT 1063 Hope Street November, 1998
47. Norwalk, CT 250 Westport Avenue March 1999
48. East Brunswick, NJ 8 Cornwall Court January, 1990
49. Princeton, NJ 301 North Harrison Street May, 1997
50. Freehold, NJ 200 Daniels Way April, 1998
51. Matawan, NJ 163 Route 34 April, 1998
52. Old Bridge, NJ Gaub Road and Route 516 April, 1998
53. Marlboro, NJ 34 Route 9 North April, 1998
54. Fort Lee, NJ 1355 15th Street June, 1998
55. Ramsey, NJ 1100 Route 17 North June, 1998
56. Mahwah, NJ 7 Leighton Place June, 1998
57. Parsippany, NJ 2651 Route 10 August, 1998
58. Springfield, NJ 215 Morris Avenue August, 1998
59. Colonia, NJ 1250 Route 27 August, 1998
60. Franklin Park, NJ 3911 Route 27 August, 1998
61. Plainsboro, NJ 10 Schalks Crossing August, 1998
62. Somerset, NJ 120 Cedar Grove Lane August, 1998
63. Hoboken, NJ 221 Washington Street October 1998
64. West Caldwell, NJ+ Bloomfield Avenue Opening 1999
WASHINGTON SPORTS CLUBS:
65. Washington, DC 214 D Street, S.E. January, 1980
66. Washington, DC 1835 Connecticut Avenue, N.W. January, 1990
67. Washington, DC 1990 M Street, N.W. February, 1993
68. Washington, DC 2251 Wisconsin Avenue, N.W. May, 1994
69. Bethesda, MD 4903 Elm Street May, 1994
70. North Bethesda, MD 10400 Old Georgetown Road June, 1998
71. Germantown, MD 12623 Wisteria Drive July, 1998
72. Centreville, VA Old Centreville Crossing December, 1997
73. Alexandria, VA+ 3654 King Street Opening 1999
74. Fairfax, VA* Lee Highway Opening 1999
BOSTON SPORTS CLUBS:
75. Boston, MA 561 Boylston Street November, 1991
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DATE OPENED OR
MANAGEMENT
LOCATION ADDRESS ASSUMED
- ----------------------------------- ------------------------------------ -------------------
<S> <C> <C>
76. Allston, MA 15 Gorham Street July, 1997
77. Boston, MA 1 Bulfinch Place August, 1998
78. Framingham, MA Sherwood Plaza, 124 Worcester Rd September, 1998
79. Weymouth, MA+ 553 Washington Street Opening 1999
80. Boston, MA* 201 Brookline Avenue Opening 2000
PHILADELPHIA SPORTS CLUBS:
81. Philadelphia, PA 220 South 5th Street January 1999
82. Philadelphia, PA+ 2000 Hamilton Street Opening 1999
SWISS SPORTS CLUBS:
83. Basel, Switzerland St. Johanns-Vorstadt 41 August, 1987
84. Zurich, Switzerland Glarnischstrasse 35 August, 1987
</TABLE>
- ------------------------
+ Under construction, club in "pre-sales."
* Signed leases for greenfield club development.
In addition to the club locations listed above, the Company owns the 151
East 86th Street location, which houses a Company club and a retail tenant that
generated approximately $500,000 of rental income for the Company during twelve
months ended December 31, 1998. All other clubs occupy leased space pursuant to
long-term leases (generally 15 to 25 years, including options). In the next five
years (ending December 31, 2004), only two of the Company's club leases will
expire without any renewal option.
The Company leases approximately 35,000 square feet of office space in New
York City, and 3,000 square feet of office space in Washington, DC, for
administrative, accounting and general corporate purposes. The Company also
leases warehouse and commercial space in Long Island City, New York, for storage
purposes and for the operation of a centralized laundry facility for certain New
York clubs.
As of December 31, 1998, 65 of the existing clubs were wholly-owned by the
Company and four were managed and/or partly-owned by the Company (the "Managed
Clubs"). The Managed Clubs are controlled by the Company, which acts as either
general partner or managing agent, and are operated by the Company in the same
manner as wholly owned clubs, subject to certain rights held by the Company's
partners or the club owners, according to the applicable partnership or
management agreements. As partner or manager, the Company receives a share of
club cash flow, which varies from club to club, but is typically 40.0%. These
amounts appear on the Company's operating statements as management fees and
other. However, the gross revenue generated by the Managed Clubs (approximately
$7.5 million per year) is not reflected in the financial statements, because the
Managed Clubs are not consolidated. The Company acquired two Managed Clubs
during fiscal 1995 and three Managed Clubs during fiscal 1998 which were
originally party to management agreements with the Company. In the future, the
Company may seek to acquire Managed Clubs, if such opportunities arise.
ITEM 3. LEGAL PROCEEDINGS
A claim had been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. A further claim was filed in New York State Supreme Court on April
1998 and was dismissed in December 1998.
The Company is a party to various other lawsuits arising in the normal
course of business. Management believes that the ultimate outcome of these
matters will not have a material adverse effect on the Company's business,
results of operations or financial condition.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Not applicable
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND CLUB OPERATING DATA)
Set forth below are selected historical consolidated financial and other
operating data of the Company as of the dates and for the periods presented. The
selected historical consolidated statement of operations data for the years
ended May 31, 1996, 1997, 1998 and the seven months ended December 31, 1998 and
the selected historical consolidated balance sheet data as of May 31, 1997, 1998
and December 31, 1998 were derived from the audited Consolidated Financial
Statements of the Company, which are included herein. The selected historical
consolidated statement of operations data for the seven months ended December
31, 1997 were derived from the unaudited consolidated financial statements of
the Company which are included herein and the selected historical consolidated
balance sheet data as of December 31, 1997 were derived from the unaudited
consolidated financial statements which are not included herein. The selected
historical consolidated statement of operations data for the years ended May 31,
1994 and 1995 and the selected historical consolidated balance sheet data as of
May 31, 1994, 1995 and 1996 were derived from the audited consolidated financial
statements of the Company, which are not included herein. The information
contained in this table and accompanying notes should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and accompanying notes
thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues................................................................. $ 24,890 $ 33,349 $ 43,755 $ 56,567 $ 82,350
Operating expenses:
Payroll and related.................................................... 10,799 16,105 18,626 23,321 33,309
Club operating......................................................... 8,115 11,740 14,542 18,044 25,858
General and administrative............................................. 2,359 3,321 3,562 3,774 5,825
Depreciation and amortization.......................................... 1,514 2,168 2,929 4,219 7,736
Compensation expense incurred in connection with stock options(1)...... -- 635 1,967 5,933 1,442
--------- --------- --------- --------- ---------
Operating income (loss).............................................. 2,103 (620) 2,129 1,276 8,180
Interest expense, net of interest income................................. 342 654 952 2,455 5,902
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for income tax.............. 1,761 (1,274) 1,177 (1,179) 2,278
Provision (benefit) for income tax....................................... 824 (541) 628 (243) 1,131
Extraordinary item(2).................................................... -- -- -- -- (782)
Cumulative effect of change in accounting policy(3)...................... -- -- -- -- (88)
--------- --------- --------- --------- ---------
Net income (loss).................................................... 937 (733) 549 (936) 277
Accreted dividends on preferred stock.................................... -- (258) (400) (1,286) (2,387)
Net Income (loss) attributable to common stockholders................ $ 937 ($ 991) $ 149 ($ 2,222) ($ 2,110)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER OPERATING DATA:
EBITDA(4)................................................................ $ 3,617 $ 1,548 $ 5,058 $ 5,495 $ 15,916
EBITDA margin(4)......................................................... 14.5% 4.6% 11.6% 9.7% 19.3%
Deferred lease expense................................................... $ 1,017 $ 1,232 $ 1,277 $ 1,620 $ 2,671
Cash provided by (used in):
Operating activities................................................... 2,839 3,283 5,695 12,302 15,733
Investing activities................................................... (5,648) (7,674) (5,487) (13,571) (36,040)
Financing activities................................................... $ 2,910 $ 4,244 $ 144 $ 2,809 $ 40,836
New clubs opened(5)...................................................... 4 2 2 3 1
Clubs acquired(5)........................................................ -- -- 1 5 13
Wholly owned clubs operated at end of period(5).......................... 16 20 23 28 45
Total clubs operated at end of period(6)................................. 23 25 28 35 49
Members at end of period(7).............................................. 38,300 48,300 54,800 78,600 125,100
Comparable club revenue increase(8)...................................... 10.9% 14.7% 27.3% 17.7% 26.2%
Revenue per weighted average club(9)..................................... $ 1,809 $ 1,794 $ 2,017 $ 2,267 $ 2,287
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED DECEMBER 31,
--------------------
<S> <C> <C>
1997 1998
--------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................................................... $ 42,990 $ 71,662
Operating expenses:
Payroll and related....................................................................................... 17,621 28,001
Club operating............................................................................................ 13,258 24,261
General and administrative................................................................................ 2,742 5,828
Depreciation and amortization............................................................................. 3,944 8,818
Compensation expense incurred in connection with stock options(1)......................................... 397 434
--------- ---------
Operating income........................................................................................ 5,028 4,320
Interest expense, net of interest income.................................................................... 3,270 5,279
--------- ---------
Income (loss) before provision (benefit) for income tax................................................. 1,758 (959)
Provision (benefit) for income tax.......................................................................... 888 (399)
Extraordinary item(2)....................................................................................... (782) --
Cumulative effect of change in accounting policy(3)......................................................... (88) --
--------- ---------
Net income (loss)....................................................................................... -- (560)
Accreted dividends on preferred stock....................................................................... (1,485) (2,146)
Net (loss) attributable to common stockholders.......................................................... ($ 1,485) ($ 2,706)
--------- ---------
--------- ---------
OTHER OPERATING DATA:
EBITDA(4)................................................................................................... 8,972 13,138
EBITDA margin(4)............................................................................................ 20.9% 18.3%
Deferred lease expense...................................................................................... $ 1,354 $ 1,493
Cash provided by (used in):
Operating activities...................................................................................... 7,193 7,393
Investing activities...................................................................................... (12,362) (47,352)
Financing activities...................................................................................... $ 42,361 $ 36,116
New clubs opened(5)......................................................................................... -- 4
Clubs acquired(5)........................................................................................... 5 16
Wholly owned clubs operated at end of period(5)............................................................. 35 65
Total clubs operated at end of period(6).................................................................... 40 69
Members at end of period(7)................................................................................. 99,900 178,700
Comparable club revenue increase(8)......................................................................... 24.1% 25.5%
Revenue per weighted average club(9)........................................................................ $ 1,289 $ 1,184
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER
AS OF MAY 31, 31,
------------------------------------------- ----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... ($1,219) ($2,329) ($4,048) ($8,436) $ 5,898 $26,772 $ 478
Total assets.......................................... 18,421 27,274 34,805 52,923 111,977 104,948 157,416
Long-term debt, including current installments........ 10,205 10,430 10,453 41,071 88,289 89,368 89,524
Redeemable senior preferred stock..................... -- -- -- -- -- -- 36,735
Stockholders' equity (accumulated deficit)............ 2,343 1,987 5,474 (6,951) (5,107) (6,342) (2,333)
</TABLE>
- ------------------------
(1) Represents non-cash charges related to the vesting of certain stock options
issued to management and the accretion of preferred dividends related to
preferred stock underlying certain of such options.
(2) Reflects the write-off of previously capitalized fees and expenses of
$782,000, net of taxes of $624,000, related to the repayment of certain
indebtedness. See Note 15 to the Company's Consolidated Financial
Statements.
(3) Prior to fiscal 1998, the Company capitalized direct costs incurred to
obtain leases for new clubs to be constructed by the Company. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement
of Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5")
which requires that these costs be expensed as incurred. In connection with
the adoption of SOP 98-5 the Company, effective June 1, 1997, recorded a
pre-tax charge of $88,000 net of $70,000 in taxes, as the cumulative effect
of this accounting change. See Note 2(n) to the Company's Consolidated
Financial Statements.
(4) EBITDA is defined as earnings before interest, taxes, depreciation,
amortization, extraordinary charges and cumulative effect of changes in
accounting policy. EBITDA is presented because management believes it
provides useful information regarding the operating performance and
financial condition of the Company. EBITDA should not be considered in
isolation or as a substitute for net income, cash flows, or other
consolidated income (loss) or cash flow data prepared in accordance with
GAAP or as a measure of the Company's profitability or liquidity. EBITDA
Margin is defined as EBITDA as a percentage of revenues.
15
<PAGE>
(5) During fiscal 1995, the Company acquired two formerly managed clubs. During
fiscal 1997, the Company opened or acquired six clubs and closed one club
upon the expiration of its lease. During fiscal 1998, the Company opened or
acquired 14 clubs and acquired three formerly managed clubs.
(6) Includes all clubs whether wholly-owned or managed.
(7) Represents members at wholly-owned clubs only.
(8) The Company defines comparable clubs as those clubs operated by the Company
for at least 13 full months.
(9) Revenue per weighted average club is calculated as club revenue divided by
the product of the total numbers of clubs and their weighted average months
in operation as a percentage of the total year, or the seven months ended
December 31 as applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CHANGE OF FINANCIAL REPORTING PERIOD
The Company changed its fiscal year end from May 31 to December 31, which
resulted in a transition period of seven months ended December 31, 1998. The
decision to change the fiscal year was made for more convenience in both
internal and external communications. To aid comparative analysis, the Company
has elected to present the results of operations for the seven month periods
ended December 31, 1998, and December 31, 1997, unaudited, along with the
previously reported results of operations for the twelve months ended May 31,
1998, and May 31, 1997.
INTRODUCTION
The Company is one of the two leading owners and operators of fitness clubs
in the Northeast and Mid-Atlantic regions of the United States. As of December
31, 1998, the Company operated 69 clubs that collectively served approximately
179,000 members. The Company develops clusters of clubs to serve densely
populated major metropolitan regions in which a high percentage of the
population commutes to work. The Company services such populations by clustering
clubs near the highest concentrations of its target customers' areas of both
employment and residence. The Company's target customer is college-educated,
typically between the ages of 20 and 44 and earns an annual income in excess of
$50,000.
The Company's goal is to develop the premier health club network in each of
the major metropolitan regions it enters. Management believes that clustering
clubs allows the Company to achieve strategic operating advantages that enhance
its ability to achieve this goal. In entering new regions, the Company develops
these clusters by initially opening or acquiring clubs located in the more
central urban markets of the region and then branching out from these urban
centers to suburbs and ancillary communities. Capitalizing on this clustering of
clubs, as of December 31, 1998, approximately half of the Company's members
participated in a membership plan that allows unlimited access to all of the
Company's clubs for a higher membership fee.
The Company has executed this strategy successfully in the New York region
through the network of clubs it operates under its NYSC brand name. The Company
is the largest fitness club operator in Manhattan with 23 locations and operates
a total of 55 clubs under the NYSC name within a defined radius of New York
City. The Company is in the process of more fully developing clusters within a
smaller radius surrounding Washington, DC under its WSC brand name and has begun
establishing similar clusters surrounding Boston and Philadelphia under its BSC
and PSC brand names, respectively. The Company employs localized brand names for
its clubs to create an image and atmosphere consistent with the local community,
and to foster the recognition as a local network of quality fitness clubs rather
than a national chain.
The Company's operating and selling expenses are comprised of both fixed and
variable costs. The fixed costs include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commissions, advertising and supplies. As clubs mature and increase their
membership base, fixed costs are typically spread over an increasing revenue
base and operating margins tend to improve.
16
<PAGE>
During the last several years, the Company has increased revenues and EBITDA
by expanding its club base in the New York, Washington, DC, Boston and other
metropolitan areas along the Northeast Corridor. As a result of the Company's
expanding club base and relatively fixed nature of the Company's operating
costs, the Company's EBITDA has increased from $1.5 million in fiscal 1995 to
$20.3 million for the twelve month period ended December 31, 1998, and EBITDA as
a percentage of revenues has increased from 4.6% to 18.6% over the same period.
Management expects the strong growth in revenues, and EBITDA to continue as the
45 clubs opened or acquired since the beginning of fiscal 1996 continue to
mature. Based on the Company's historical experience, a new club tends to
experience significant increase in revenues during its first three years of
operation as it reaches maturity. Because there is relatively little incremental
cost associated with such increasing revenue, there is a greater proportionate
increase in profitability. The Company believes that the revenues, EBITDA
(before corporate overhead) and operating income (before corporate overhead) of
these 45 clubs will increase as they mature. As a result of the Company's
accelerated expansion program, however, management expects EBITDA and operating
income margins to be negatively impacted in the near term, as further new clubs
are added.
COMPARABLE CLUB REVENUE
The Company defines comparable clubs as those clubs that were operated by
the Company for at least 13 full months. The Company's comparable club revenue
increased 25.5%, 26.2%, 17.7%, and 27.3%, for the seven months ended December
31, 1998 and fiscal 1998, 1997 and 1996, respectively.
NET LOSSES
The Company incurred a net loss of $560,000, $936,000 and $733,000 for the
seven months ended December 31,1998, fiscal 1997 and fiscal 1995 respectively.
Losses have resulted from a variety of costs, including, but not limited to,
amortization of goodwill and debt financing costs resulting from the Company's
acquisition strategy as well as compensation expense incurred in connection with
the vesting of certain stock options held by management. Increased goodwill,
amortization, depreciation and financing costs associated with future
acquisitions and greenfield club openings will impact profitability and may
result in net losses in the future.
RECENT DEVELOPMENTS
The Company acquired two clubs and opened three greenfield clubs from
January 1, 1999 through March 15, 1999. The aggregate purchase price of the
acquired clubs totaled $1,709 which included a cash payment of $1,000 and the
issuance of a note payable totaling $709. In January 1999, the Company commenced
operations in the Philadelphia market with the opening of a new club under the
PSC name.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
revenue for the periods indicated:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998
--------- --------- --------- --------- ---------
Revenue.............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Payroll and related.................................................. 42.6 41.2 40.4 41.0 39.1
Club operating....................................................... 33.2 31.9 31.4 30.8 33.9
General and administrative........................................... 8.1 6.7 7.1 6.4 8.1
Depreciation and amortization........................................ 6.7 7.5 9.4 9.2 12.3
Compensation expense incurred in connection with stock options....... 4.5 10.5 1.8 0.9 0.6
--------- --------- --------- --------- ---------
Operating income................................................. 4.9 2.2 9.9 11.7 6.0
Interest expense, net of interest income............................. 2.2 4.3 7.2 7.6 7.3
--------- --------- --------- --------- ---------
Income (loss) before provision (benefit) for income tax............ 2.7 (2.1) 2.7 4.1 (1.3)
Provision (benefit) for income tax................................... 1.4 (0.4) 1.4 2.1 (0.5)
Extraordinary item................................................... -- -- (0.9) (1.8) --
Cumulative effect of change in accounting policy..................... -- -- (0.1) (0.2) --
--------- --------- --------- --------- ---------
Net income (loss).................................................. 1.3 (1.7) 0.3 0.0 (0.8)
Accreted dividend on preferred stock................................. 0.9 2.2 2.9 3.4 3.0
--------- --------- --------- --------- ---------
Net income (loss) attributable to common stockholders.............. 0.4% (3.9)% (2.6)% (3.4)% (3.8)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SEVEN MONTHS ENDED DECEMBER 31, 1998 COMPARED TO SEVEN MONTHS ENDED DECEMBER 31,
1997
REVENUES. Revenues increased approximately $28.7 million, or 66.7%, to
$71.7 million during the seven months ended December 31, 1998 from $43.0 million
in the seven months ended December 31, 1997. This increase resulted primarily
from maturation of the 16 clubs opened or acquired during fiscal 1998
(approximately $13.2 million) and the 20 clubs opened or acquired during the
seven months ended December 31, 1998 (approximately $8.0 million). In addition,
revenues increased during the period by $7.1 million at the Company's mature
clubs resulting from increased membership and non membership revenues such as
private training.
OPERATING EXPENSES. Operating expenses increased $29.3 million, or 77.4%,
to $67.3 million in the seven months ended December 31, 1998, from $38.0 million
in the seven months ended December 31, 1997. The increase was primarily due to
an 89.5% increase in total months of club operations to 417 in the seven months
ended December 31, 1998 from 220 in the seven months ended December 31, 1997, as
highlighted by the following factors:
Payroll and related increased by $10.4 million, or 58.9% to $28.0
million in the seven months ended December 31, 1998, from $17.6 million in
the seven months ended December 31, 1997. This increase was attributable to
the acquisition or opening of 16 clubs in fiscal 1998 and 20 clubs during
the seven month period ended December 31, 1998.
Club operating increased by $11.0 million, or 83.0% to $24.3 million in
the seven months ended December 31, 1998, from $13.3 million in the seven
months ended December 31, 1997. This increase is attributable to the
acquisition or opening of 16 clubs in fiscal 1998 and 20 clubs during the
seven month period ended December 31, 1998.
18
<PAGE>
General and administrative increased by $3.1 million, or 112.5% to $5.8
million in the seven months ended December 31, 1998, from $2.7 million, in
the seven months ended December 31, 1997. This increase is attributable to
expenses associated with the Company's expansion, including the expansion of
the Company's corporate office and upgrade of the Company's management
information systems. In addition the Company wrote-off $169,000 of expenses
associated with the preparation for an initial public offering, which has
been postponed due to market volatility.
Depreciation and amortization increased by $4.9 million, or 123.6% to
$8.8 million in the seven months ended December 31, 1998, from $3.9 million
in the seven months ended December 31, 1997. This increase is attributable
primarily to the increased fixed and intangible assets arising out of new
club acquisitions and openings during the seven months ended December 31,
1998, and depreciation and amortization for fixed asset additions,
acquisitions or openings since December 31, 1997. Fixed and intangible
assets acquired during the last five months ended May 31, 1998 totaled $12.6
million and $9.8 million, respectively. Fixed and intangible assets acquired
during the first seven months ended December 31, 1998 totaled $33.0 million
and $20.7 million respectively.
Compensation expense in connection with stock options increased $37,000,
or 9.3% to $434,000 in the seven months ended December 31, 1998, from
$397,000 in the seven months ended December 31, 1997, as a result of a
compounding feature in the calculation of dividends on the Preferred stock
options.
INTEREST EXPENSE. Interest expense increased $1.8 million to $5.6 million
during the seven months ended December 31, 1998, from $3.8 million in the seven
months ended December 31, 1997. The increased level of interest expense was
primarily due to a full period of interest related to the Senior Notes (drawn
down in October 1997), as well as drawings under the line of credit to fund
certain acquisitions during 1998.
INTEREST INCOME. Interest income decreased $254,000 to $272,000 during the
seven months ended December 31, 1998, from $526,000 in the seven months ended
December 31, 1997. The decreased level of interest income was primarily due to
lower cash on hand as the Company invested in acquisitions and new club
construction.
PROVISION (BENEFIT) FOR INCOME TAX. The income tax benefit for the seven
months ended December 31, 1998 was $399,000 compared to a tax expense of
$888,000 for the seven months ended December 31, 1997. During the seven months
ended December 31, 1998, the Company's effective tax rate was impacted by net
operating losses incurred by certain clubs located in states where such losses
could not currently be utilized and higher tax-exempt interest income.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5 (Accounting for the Costs of Start-up Activities), the Company has
expensed all Organizational Costs capitalized in previous fiscal years.
Accordingly, $158,000 was written off, $88,000 net of a tax effect of $70,000
EXTRAORDINARY ITEM. During the seven months ended December 31, 1997, the
Company issued 9 3/4% Senior Notes due 2004 pursuant to which the Company repaid
its existing indebtedness. Accordingly, previously capitalized fees and expenses
of $1.4 million relating to the former debt were written off, $782,000 net of a
tax effect of $624,000.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the preferred
stock increased $0.6 million to $2.1 million in the seven months ended December
31, 1998, from $1.5 million in the seven months ended December 31, 1997. This
increase is as a result of a compounding feature in the calculation of the
accretion of dividends on the Series A and B preferred stock, as well as
dividends subsequent to the issuance of redeemable senior preferred stock.
19
<PAGE>
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
REVENUES. Revenues increased approximately $25.8 million, or 45.6%, to
$82.4 million during fiscal 1998 from $56.6 million in fiscal 1997. This
increase resulted from the maturation of three clubs opened or acquired during
fiscal 1996 (approximately $3.0 million); the six clubs opened or acquired
during fiscal 1997 (approximately $8.1 million) and 14 clubs opened or acquired
during fiscal 1998 (approximately $10.1 million). In addition, revenues
increased during fiscal 1998 by $4.2 million at the Company's mature clubs.
OPERATING EXPENSES. Operating expenses increased $18.9 million, or 34.1%,
to $74.2 million in fiscal 1998 from $55.3 million in fiscal 1997. This increase
was primarily due to a 40.4% increase in total months of club operations to 417
in fiscal 1997 from 297 in fiscal 1996, as highlighted by the following factors:
Payroll and related increased by $10.0 million, or 42.8%, to $33.3
million in fiscal 1998, from $23.3 million in fiscal 1997. This increase was
attributable to the acquisition or opening of 14 clubs in fiscal 1998 and a
full year of operating the six clubs opened or acquired in fiscal 1997.
Club operating increased by $7.9 million, or 43.3%, to $25.9 million in
fiscal 1998, from $18.0 million in fiscal 1997. This increase is
attributable to the acquisition or opening of 14 clubs in fiscal 1998 and
the additional expenses attributable to operating the six clubs opened or
acquired in fiscal 1997.
General and administrative increased by $2.0 million, or 54.3%, to $5.8
million in fiscal 1998, from $3.8 million. This increase is attributable to
associated expenses as a result of the Company's expansion, such as the
expansion of the Company's corporate office, the change in accounting policy
to expense certain Organizational Costs in the period in which they are
incurred rather than capitalizing them.
Depreciation and amortization increased by $3.5 million, or 83.4%, to
$7.7 million in fiscal 1998, from $4.2 million in fiscal 1997. This increase
is attributable primarily to increased fixed assets and intangible assets
arising out of new club acquisitions and openings during fiscal 1998, and a
full year of depreciation and amortization for fixed asset additions,
acquisitions or openings during fiscal 1997. Intangible assets acquired in
fiscal 1997 and 1998 totaled $1.7 million and $14.5 million, respectively.
Compensation expense in connection with stock options decreased by $4.5
million, or 75.7%, to $1.4 million in fiscal 1998, from $5.9 million in
fiscal 1997. In 1997, this expense was attributable to the adjustment of the
Company's stock options to fair market value in connection with the
Recapitalization.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense, net of interest
income increased $3.4 million to $5.9 million during fiscal 1998 from $2.5
million in fiscal 1997. The increased level of interest expense was primarily
due to the issuance of the Senior Notes. (See Note 6 to the Consolidated
Financial Statements.)
PROVISION FOR INCOME TAX (BENEFIT). The income tax provision for fiscal 1998
was $1.1 million compared to a tax benefit of $243,000 for fiscal 1997. For
fiscal 1998, the Company's effective tax rate was negatively impacted by high
state and local tax rates combined with a tax rate change. In fiscal 1997, the
income tax benefit was reduced by adjustments to expected tax refunds reduced in
part by the reversal of a valuation allowance on state net operating losses
carryforward, which was no longer needed.
EXTRAORDINARY ITEM. During fiscal 1998, the Company issued 9 3/4% Senior
Notes due 2004 pursuant to which the Company repaid its existing indebtedness.
Accordingly, previously capitalized fees and expenses of $1.4 million relating
to the former debt were written off, $782,000 net of a tax effect of $624,000.
20
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING POLICY. In accordance with the
American Institute of Certified Public Accountants' ("AICPA") Statement of
Position 98-5 (Accounting for the Costs of Start-up Activities), the Company has
expensed all Organizational Costs capitalized in previous fiscal years.
Accordingly, $158,000 was written off, $88,000 net of a tax effect of $70,000.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $1.1 million to $2.4 million during fiscal 1998, from $1.3
million in fiscal 1997. This increase is the result of the Preferred Stock being
outstanding for a full year in 1998 and for only five months in 1997.
FISCAL YEAR ENDED MAY 31, 1997 COMPARED TO FISCAL YEAR ENDED MAY 31, 1996
REVENUES. Revenues increased $12.8 million, or 29.3%, to $56.6 million
during fiscal 1997 from $43.8 million in fiscal 1996. This increase resulted
from the maturation of four clubs opened or acquired during fiscal 1995
(approximately $2.8 million), the three clubs opened or acquired in fiscal 1996
(approximately $4.3 million), and the six clubs opened or acquired in fiscal
1997 (approximately $3.7 million). In addition, revenues increased during fiscal
1997 due to revenue growth at the Company's mature clubs resulting from
membership growth (approximately $2.1 million).
OPERATING EXPENSES. Operating expenses increased $13.7 million, or 32.8%,
to $55.3 million in fiscal 1997, from $41.6 million in fiscal 1996. This
increase was primarily due to a 16.5% increase in total months of club
operations to 297 in fiscal 1996 from 255 in fiscal 1995, as highlighted by the
following factors:
Payroll and related increased by $4.7 million, or 25.2%, to $23.3
million in fiscal 1997, from $18.6 million in fiscal 1996. This increase was
attributable to the acquisition or opening of six clubs in fiscal 1997 and a
full year of operating the three clubs opened or acquired in fiscal 1996.
Club operating increased by $3.5 million, or 24.1%, to $18.0 million in
fiscal 1997, from $14.5 million in fiscal 1996. This increase is
attributable to the acquisition or opening of six clubs in fiscal 1997 and
the additional expenses attributable to operating three clubs opened or
acquired by the Company in fiscal 1996.
General and administrative increased by $212,000, or 6.0%, to $3.8
million in fiscal 1997, from $3.6 million in fiscal 1996.
Depreciation and amortization increased by $1.3 million, or 44.0%, to
$4.2 million in fiscal 1997, from $2.9 million in fiscal 1996. This increase
is attributable to the increased fixed assets placed in service and
intangible assets acquired arising out of acquisition or opening of new
clubs.
Compensation expense in connection with stock options increased by $3.9
million, or 201.6%, to $5.9 million in fiscal 1997, from $2.0 million in
fiscal 1996. In 1997, this expense was attributable to the adjustment of the
Company's stock options to fair market value in connection with the
Recapitalization.
INTEREST EXPENSE, NET OF INTEREST INCOME. Interest expense net of interest
income, increased $1.5 million to $2.5 million in fiscal 1997 from $1.0 million
in fiscal 1996, primarily as a result of increased indebtedness due to the
Recapitalization during this period.
PROVISION FOR INCOME TAX (BENEFIT). Provision for income tax (benefit)
changed by $871,000 to a benefit of $243,000 in fiscal 1997 from an expense of
$628,000 in fiscal 1996, as a result of the loss after interest expense in
fiscal 1997. The Company's effective tax rate in fiscal 1996 was negatively
impacted by losses at certain of the Company's clubs, incurred in states where
the net operating loss could not be currently utilized. In fiscal 1997, the
income tax benefit was reduced by adjustments to expected tax refunds partially
offset by a reduction in the valuation allowance for the deferred tax assets.
ACCRETED DIVIDENDS ON PREFERRED STOCK. Accreted dividends on the Preferred
Stock increased $886,000 to $1.3 million during fiscal 1997, from $400,000 in
fiscal 1996. This increase reflects the issuance of the Preferred Stock in
connection with the Recapitalization and redemption of formerly existing
preferred stock.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its liquidity needs through cash
from operations and various borrowing arrangements. Principal liquidity needs
have included the acquisition and development of new clubs, debt service
requirements and other capital expenditures necessary to maintain existing
clubs.
OPERATING ACTIVITIES. Net cash provided by operating activities for the
seven months ended December 31, 1998 was $7.4 million compared to $7.2 million
during the seven months ended December 31, 1997. This slight increase was
primarily due to improved performance by the Company's mature clubs offset by
recently opened or acquired clubs which are immature and not yet operating at
normal operating margins. Excluding cash and cash equivalents, the Company
normally operates with a working capital deficit because it receives dues or fee
revenue either (i) during the month services are rendered, or (ii) when
paid-in-full, 12 months in advance. As a result, the Company has no material
accounts receivable. In addition, because initiation fees are received at
enrollment and are recognized over the estimated average term of membership, the
Company records a deferred revenue liability. Management believes that the
Company's working capital deficit is an important source of cash flow from
operating activities that it believes will continue to grow as the Company's
membership revenues increase.
INVESTING ACTIVITIES. The Company invested $47.4 million and $12.4 million
in capital expenditures and asset acquisitions during the seven months ended
December 31, 1998 and 1997, respectively, primarily as a result of the Company's
expansion efforts. The Company estimates that for the year ended December 31,
1999, it will invest an additional amount of approximately $50.0 million in
capital expenditures and asset acquisitions, which includes $16.4 million that
management intends to invest to renovate and expand certain existing clubs, $5.7
million to maintain certain existing clubs and $1.5 million to further upgrade
its management information systems. This expenditure will be funded by cash flow
generated from operations, available cash and credit facilities.
FINANCING ACTIVITIES. In October 1997, the Company issued $85.0 million
Senior Notes and entered into the Credit Facility. After payment of fees and
expenses of $3.3 million, the Company received net proceeds of $81.7 million, of
which $41.5 million was used for the repayment of certain indebtedness. The
Senior Notes contain certain restrictive covenants and restrict the payment of
dividends. The Credit Facility notes contain restrictive covenants, including a
leverage ratio and interest coverage ratio and dividend payment restrictions and
is collateralized by all the assets of the Company. Other cash flow financing
activities during 1997 and 1998 include borrowings under the Credit Facility and
the repayment of long-term debt.
As of December 31, 1998,the Company has approximately $23.0 million
available under the current Credit Facility, which matures in October 2002, and
has no scheduled amortization requirements. The Credit Facility was recently
amended to allow for maximum borrowings of $25.0 million. Although management
believes that the Company will be able to obtain or generate sufficient funds to
finance the Company's current operating and growth plans through the end of
1999, any material acceleration or expansion of that plan through additional
greenfields or acquisitions (to the extent such acquisitions include cash
payments) may require the Company to pursue additional sources of financing
prior to the end of 1999. There can be no assurance that such financing will be
available or that it will be available on acceptable terms. The inability to
finance such further or accelerated expansion on acceptable terms may negatively
impact the Company's competitive position and or materially adversely affect the
Company's business, results of operations or financial condition.
In November 1998, the Company sold $40.0 million of redeemable senior
preferred stock "Senior stock". After payment of fees and expenses of
approximately $400,000 the Company received net proceeds of $39.6 million. The
Senior stock is redeemable in November 2008, and carries a cumulative
22
<PAGE>
12.0% annual dividend which is added to the liquidation value of such preferred
shares, if not paid in cash, at the option of the Company.
EFFECT OF RECENT CHANGES IN ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which standardizes the accounting for derivative instruments by
requiring that all derivatives be recognized as assets and liabilities and
measured at fair value. SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999.
Based on current estimates, management does not believe that of SFAS No.
133, will have a material effect on the Company's financial statements.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three year and seven month period ended December
31, 1998.
YEAR 2000 COMPLIANCE
The Company has implemented a three phase program to identify and resolve
Year 2000 ("Y2K") issues related to the integrity and reliability of its
computerized information systems, computer systems embedded in the machinery and
equipment used in its operations, as well as third party or in-house developed
software. Phase one of the Company's program involved an assessment of Y2K
compliance and has been completed. In phase two of the program, the Company is
modifying, or replacing, and testing all non-Y2K compliant hardware systems.
Completion of Phase two is expected by August 1999. Phase three of the program
involves upgrades, or replacement, and testing all non-Y2K compliant software
and is also expected to be completed by August 1999.
As of December 31, 1998, the Company has spent approximately $250,000 in
addition to its normal internal information technology costs in connection with
its Y2K program. The Company expects to incur additional costs of $400,000 to
complete phases two and three of the program.
The Company requested documentation regarding Y2K compliance from all of its
suppliers and service providers. As of December 31, 1998, the Company received
confirmations from approximately 75% indicating that they are or will be Y2K
compliant. The Company expects to have further communications with those who
have not responded or have indicated further work was required to achieve Y2K
compliance.
Among other things, the Company's operations depend on the availability of
utility services, principally electricity and reliable performance by
telecommunication services. A substantial disruption in any of these services
due to providers of these services failing to achieve Y2K compliance could have
a significant adverse impact on the Company's financial results depending on the
length and severity of the disruption.
The Company will complete a contingency plan for each of its principal
operations by June 1999. The purpose of the contingency plan is to identify
possible alternatives which could be used in the event of a disruption in the
delivery of essential goods or services and to minimize the effect of such a
disruption.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K of the Company for the
seven month period ended December 31, 1998 are forward-looking statements,
including, without limitation, statements regarding future financial results and
performance, potential sales revenue and tax benefits. These
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<PAGE>
statements are subject to various risks and uncertainties, many of which are
outside the control of the Company, including the level of market demand for the
Company's services, competitive pressures, the ability to achieve reductions in
operating costs and to continue to integrate acquisitions, environmental
matters, the application of Federal and state tax laws and regulations, and
other specific factors discussed herein and in other Securities and Exchange
Commission filings by the Company. The information contained herein represents
management's best judgement as of the date hereof based on information currently
available; however, the Company does not intend to update this information to
reflect development or information obtained after the date hereof and disclaims
any legal obligation to the contrary.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's financial statements are included in this report beginning
on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and a brief account of the
business experience of each person who is currently a director or executive
officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark Smith........................................... 39 Chief Executive Officer and Director
Robert Giardina...................................... 41 President and Chief Operating Officer
Alexander Alimanestianu.............................. 39 Executive Vice President, Development
Richard Pyle......................................... 40 Executive Vice President and Chief Financial Officer
Deborah Smith........................................ 39 Senior Vice President, Operations
Senior Vice President, Information Management and
Leslie Kimerling..................................... 36 Planning
Keith Alessi......................................... 43 Director
Paul Arnold.......................................... 52 Director
Bruce Bruckmann...................................... 45 Director
Stephen Edwards...................................... 35 Director
Jason Fish........................................... 40 Director
</TABLE>
MARK SMITH joined the Company in 1985 and was appointed Chief Executive
Officer in 1995. Prior to this appointment, he held the position of Executive
Vice President of Development and International Operations. Mr. Smith has also
served as a director of the Company since September 1995. Mr. Smith has had
primary responsibility for the development and/or acquisition of the Company's
clubs since 1990, as well as responsibility for the Company's Managed Clubs in
Switzerland. Before joining the Company, Mr. Smith was a chartered accountant
with Coopers & Lybrand in New York City, London and New Zealand, and a
professional squash player.
ROBERT GIARDINA has served as President and Chief Operating Officer of the
Company since 1992. Mr. Giardina joined the Company in 1981 (when the Company
had four clubs) after six years of
24
<PAGE>
employment with other fitness club companies. With over 20 years of experience
in the club industry, Mr. Giardina has expertise in virtually every aspect of
facility management and club operations. In addition to operations, Mr. Giardina
has primary responsibility for sales and marketing.
ALEXANDER ALIMANESTIANU joined the Company in 1990, and became Executive
Vice President, Development in 1995. From 1990 to 1995, Mr. Alimanestianu served
as Vice President and Senior Vice President. Before joining the Company, he
worked as a corporate attorney for six years with one of the Company's outside
law firms. Mr. Alimanestianu has been involved in the development or acquisition
of over 40 of the Company's clubs.
RICHARD PYLE, a British chartered accountant, joined the Company in 1987 and
has been chiefly responsible for the Company's financial matters since that
time, as a Vice President in 1988, Senior Vice President and Chief Financial
Officer in 1992 and Executive Vice President in 1995, successively. Before
joining the Company, Mr. Pyle worked in public accounting (in the United States,
Bermuda, Spain and in England) specializing in the hospitality industry, and as
the corporate controller for a British public company in the leisure industry.
DEBORAH SMITH joined the Company in 1987, and served as Vice President
before her appointment as a Senior Vice President of Operations in 1995. Ms.
Smith has been responsible for the startup and operation of Company clubs in New
York, Switzerland, Maryland and Washington, DC. She oversees club operations in
all U.S. geographic areas.
LESLIE KIMERLING joined the Company in 1994 and became Senior Vice President
in 1995 with responsibility for the development of the Company's information
management and planning capabilities. Prior to joining the Company, Ms.
Kimerling was a management consultant for four years.
KEITH ALESSI has served as a director of the Company since April, 1997. Mr.
Alessi is President, Chief Executive Officer and a director of Telespectrum
Worldwide, Inc., a position he has held since March 1998. From May 1996 to March
1998, Mr. Alessi served as Chairman, President and Chief Executive Officer of
Jackson Hewitt, Inc. Prior to that, Mr. Alessi held various positions with Farm
Fresh, Inc. including Chief Financial Officer and President. Mr. Alessi is also
a director of Cort Business Services, Inc. and Shoppers Food Warehouse Corp.
PAUL ARNOLD has served as a director of the Company since April, 1997. Mr.
Arnold has served as President and Chief Executive Officer of Cort Business
Services, Inc., a leading national supplier of high end rental furniture since
1992.
BRUCE BRUCKMANN has served as a director of the Company since December,
1996. Since 1994, Mr. Bruckmann has served as a principal of BRS. From 1983
until 1994, Mr. Bruckmann served as an officer and subsequently a Managing
Director of Citicorp Venture Capital, Ltd. ("CVC"). Mr. Bruckmann is currently a
director of Mediq Inc., Penhall International, Inc., Jitney Jungle Stores of
America, Inc., Mohawk Industries, Inc., AmeriSource Health Corporation,
Chromcraft Revington Corporation, Cort Business Services, Inc., California Pizza
Kitchen, Inc., Acapulco Restaurants, Inc., and Anvil Knitwear, Inc. and a
director of several private companies.
STEPHEN EDWARDS has served as a director of the Company since December,
1996. Since 1994, Mr. Edwards has served as a principal of BRS. From 1993 until
1994, Mr. Edwards served as an officer of CVC. From 1988 through 1991, he was an
associate of CVC. Prior to joining CVC, Mr. Edwards worked with
Citicorp/Citibank in various corporate finance positions. Mr. Edwards is
currently a director of Anvil Knitwear, Inc. and American Paper Group, Inc., and
a director of several private companies.
JASON FISH has been a director of the Company since December, 1996. Mr. Fish
has been a Managing Member of Farallon Capital Management, L.L.C. ("FCM") and
Farallon Partners, L.L.C., the Farallon's two management entities, since April
1996. Mr. Fish was a General Partner of the Farallon investment
25
<PAGE>
partnerships and a Managing Director of FCM's predecessor, Farallon Capital
Management, Inc., from 1990 to 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following summarizes, for the fiscal year indicated, the principal
components of compensation for the Company's Chief Executive Officer and the
four highest compensated executive officers (collectively, the "named executive
officers"). The compensation set forth below fully reflects compensation for
work performed on behalf of the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------
OTHER ANNUAL LONG-TERM COMPENSATION
SALARY BONUS(1) COMPENSATION AWARDS COMMON STOCK
NAME AND PRINCIPAL POSITION PERIOD ($) ($) ($) UNDERLYING OPTIONS/ SARS (#)
- ----------------------------- --------- ----------- ----------- ----------------- -------------------------------
<S> <C> <C> <C> <C> <C>
Mark Smith, Chief Executive
Officer.................... 1998(2) 216,600 167,367 -- --
1998(3) 360,500 330,000 -- --
1997(3) 350,000 176,000 -- 8,830
Robert Giardina, President
and Chief Operating
Officer.................... 1998(2) 205,429 127,402 -- --
1998(3) 341,906 250,000 -- --
1997(3) 331,948 118,000 -- 8,829
Richard Pyle, Executive Vice
President and Chief
Financial Officer.......... 1998(2) 112,596 97,143 -- --
1998(3) 187,399 187,500 -- --
1997(3) 181,941 85,000 -- 8,828
Alexander Alimanestianu,
Executive Vice President,
Development................ 1998(2) 112,596 97,143 -- --
1998(3) 187,399 187,500 -- --
1997(3) 178,711 85,000 -- 8,828
Deborah Smith, Senior Vice
President, Operations...... 1998(2) 90,539 64,539 -- --
1998(3) 141,100 125,000 -- 400
1997(3) 136,990 63,475 -- 5,350
</TABLE>
- ------------------------
(1) Includes annual bonus payments under the Company's Annual Bonus Plan for
fiscal 1998 and 1997, and Company estimates of annual pro-rated amounts for
the seven month period ended December 31, 1998.
(2) Includes the seven months ended December 31, 1998.
(3) Includes the twelve month period ended May 31.
26
<PAGE>
OPTION/SAR GRANTS DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1998
There were no options granted by the Company during the seven months ended
December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES DURING THE SEVEN MONTHS ENDED DECEMBER 31, 1998
AND 1998 YEAR-END OPTION/SAR VALUES
The following summarizes exercises of stock options (granted in prior years)
by the named executive officers during the seven months ended December 31, 1998
as well as the number and value of all unexercised options held by the named
executive officers as of December 31, 1998.
<TABLE>
<CAPTION>
EXERCISABLE/UNEXERCISABLE
------------------------- EXERCISABLE/UNEXERCISABLE
----------------------------------
NUMBER OF SECURITIES
SHARES OPTIONS/SARS AT FY- END VALUE OF UNEXERCISED IN-THE-
ACQUIRED (#) MONEY OPTIONS/SARS AT
ON VALUE UNDERLYING UNEXERCISED FY-END($)(1)
EXERCISE (#) REALIZED ------------------------- ----------------------------------
NAME COMMON ($) COMMON COMMON PREFERRED COMMON PREFERRED
- ------------------- --------------- --------------- ------------- ---------- ------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark Smith......... -- -- 3,532/5,298 42,812/0 187,196/280,794 1,418,793/0
Robert Giardina.... -- -- 3,532/5,297 32,793/0 187,196/280,741 1,086,763/0
Richard Pyle....... -- -- 3,532/5,296 27,569/0 187,196/280,688 913,639/0
Alexander
Alimanestianu.... -- -- 3,532/5,296 27,199/0 187,196/280,688 901,377/0
Deborah Smith...... -- -- 2,220/3,530 9,530/0 116,260/181,490 315,825/0
</TABLE>
- ------------------------
(1) Value realized is based upon the fair market value of the stock at the
exercise date minus the exercise price. Fair market value was determined in
good faith by the Board of Directors and was based upon the historical and
projected financial performance of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Bruce Bruckmann,
Stephen Edwards and Mark Smith. Messrs. Bruckmann and Edwards are non-employee
directors of the Company.
MANAGEMENT EQUITY AGREEMENTS
Simultaneously with the Recapitalization, the Company entered into Executive
Stock Agreements with certain of the officers and other key employees of the
Company. Pursuant to the Executive Stock Agreements, the executives each have
purchased shares of Common Stock and/or shares of Series B Preferred of the
Company at a purchase price of $1.00 per share of Common Stock and $35.00 per
share of Series B Preferred Stock.
EQUITY INCENTIVE PLAN
The Company intends to adopt the Long-Term Equity Incentive Plan (the
"Equity Incentive Plan"), designed to provide incentives to present and future
executive, managerial, marketing, technical and other key employees, and
consultants and advisors of the Company and its subsidiaries ("Participants") as
may be selected in the sole discretion of the Company's Board of Directors. The
Equity Incentive Plan will provide for the granting to participants of the
following types of incentive awards: stock options, stock appreciation rights
("SARs"), restricted stock, performance units, performance grants and other
types of awards that the Compensation Committee of the Board (the "Committee")
deems to be consistent with the purposes of the Equity Incentive Plan. An
aggregate amount of shares of Common Stock (which amount represents
approximately 5.0% of the Company's authorized Common Stock) are reserved for
issuance under the Equity Incentive Plan. The Equity Incentive Plan affords the
Company
27
<PAGE>
latitude in tailoring incentive compensation for the retention of key personnel,
to support corporate and business objectives, and to anticipate and respond to a
changing business environment and competitive compensation practices.
The Committee will have exclusive discretion to select the Participants and
to determine the type, size and terms of each award, to modify the terms of
awards, to determine when awards will be granted and paid, and to make all other
determinations which it deems necessary or desirable in the interpretation and
administration of the Equity Incentive Plan. The Equity Incentive Plan will
terminate ten years from the date that is approved and adopted by the
stockholders of the Company, unless extended for up to an additional five years
by action of the Board of Directors. With limited exceptions, including
termination of employment as a result of death, disability or retirement, or
except as otherwise determined by the Committee, rights to these forms of
contingent compensation will be forfeited if a recipient's employment or
performance of services terminates within a specified period following the
award. Generally, a Participant's rights and interest under the Equity Incentive
Plan will not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order.
Options, which include nonqualified stock options and incentive stock
options, are rights to purchase a specified number of shares of Common Stock at
a price fixed by the Committee. The option price may be less than, equal to or
greater than the fair market value of the underlying shares of Common Stock, but
in no event shall the exercise price of an incentive stock option be less than
the fair market value on the date of grant. Options generally will expire no
later than ten years after the date on which they are granted. Options will
become exercisable at such times and in such installments as the Committee shall
determine. Payment of the option price must be made in full at the time of
exercise in such form (including, but not limited to, cash or Common Stock of
the Company) as the Committee may determine.
The Equity Incentive Plan will provide that an SAR may be granted alone, or
in connection with the grant of an option, either at the time of grant of the
related option or by amendment thereafter to an outstanding option. SARs granted
in connection with options shall be exercisable only when, to the extent and on
the condition that, any related option is exercisable. The exercise of an option
shall result in an immediate forfeiture of any related SAR to the extent the
option is exercised, and the exercise of an SAR shall cause an immediate
forfeiture of any related option to the extent the SAR is exercised.
Upon the exercise of an SAR, the Participant shall be entitled to a
distribution in an amount equal to the difference between the fair market value
of a share of Common Stock on the date of exercise and the exercise price of the
SAR or, in the case of SARs granted in tandem with options, any option to which
the SAR is related, multiplied by the number of shares of Common Stock as to
which the SAR is exercised. The Committee shall decide whether such distribution
shall be in cash, in shares of Common Stock having a fair market value equal to
such amount, in other securities having a fair market value equal to such amount
or in a combination thereof.
A restricted stock award will be an award of a given number of shares of
Common Stock which are subject to a restriction against transfer and to a risk
of forfeiture, during a period set by the Committee. During the restriction
period, the Participant generally will have the right to vote and receive
dividends on the shares. Dividends received while under restriction will be
treated as compensation.
The Equity Incentive Plan will provide that performance awards are those
whose final value, if any, is determined by the degree to which specified
performance objectives have been achieved during an award period set by the
Committee, subject to such adjustments as the Committee may approve based on
relevant factors. Performance objectives will be based on measures of Company,
unit or Participant performance, or any combination of these and other factors,
as the Committee may determine. The Committee will make such adjustments in the
computation of any performance measure as it deems appropriate. The Committee
shall determine the portion of each performance award that has been earned by a
participant on the basis of the Company's performance over the performance cycle
in
28
<PAGE>
relation to the performance goals for such cycle. The earned portion of a
performance award may be paid out in shares of Common Stock, cash, other
securities of the Company, or any combination thereof, as the Committee may
determine.
The Equity Incentive Plan will also provide that, upon the liquidation or
dissolution of the Company, all outstanding awards under the Equity Incentive
Plan shall terminate immediately prior to the consummation of such liquidation
or dissolution, unless otherwise provided by the Committee. In the event of a
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, distribution of assets, or any other change in
the corporate structure or shares of the Company, the Committee shall make such
adjustment as it deems appropriate in the number and kind of shares or other
property reserved for issuance under the Equity Incentive Plan, in the number
and kind of shares or other property covered by grants previously made under the
Equity Incentive Plan, and in the exercise price of outstanding options and
SARs. In the event of any merger, consolidation or other reorganization in which
the Company is not the surviving or continuing entity or in which a change in
control is to occur, all of the Company's obligations regarding options, SARs
performance awards, and restricted stock that were granted hereunder and that
are outstanding on the date of such event shall, on such terms as may be
approved by the Committee prior to such event, be assumed by the surviving or
continuing entity or canceled in exchange for property (including cash).
COMPANY BENEFIT PLANS
In April 1996, the Company implemented a 401(k) salary deferral plan (the
"401(k) Plan") which is available to eligible employees, as defined. The 401(k)
Plan provides for the Company to make discretionary contributions. The Company,
however, elected not to make contributions for the seven months ended December
31, 1998, fiscal 1998, 1997 or 1996.
29
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth (as of December 31, 1998) certain information
with respect to the beneficial ownership of the Common Stock and Preferred Stock
by: (i) each person or entity who owns of record or beneficially more than 5% or
more of any class of the Company's voting securities; (ii) each named executive
officer and director of the Company; and (iii) all directors and named executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE
COMMON STOCK OF REDEEMABLE
BENEFICIALLY COMMON STOCK SENIOR SERIES A SERIES B
NAME OWNED(1) OUTSTANDING(1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
- -------------------------------- --------------- ----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BRS (2)
126 East 56th Street, 29th
Floor
New York, New York 10022...... 504,456 38.6% -- 104,330 --
The Farrallon Entities (3)
One Maritime Plaza, Suite 1325
San Francisco, California
94111......................... 270,091 20.7% 20,000 41,045 --
The Canterbury Entities
600 Fifth Avenue, 23rd Floor
New York, New York 10020...... 139,437 10.7% 15,000 -- --
Rosewood Capital L.P. (5)
One Maritime Plaza, Suite 1330
San Francisco, California
94111......................... 17,908 1.4% 5,000 -- --
EXECUTIVE OFFICERS AND
DIRECTORS:
Mark Smith (6).................. 56,432 4.3% -- -- 42,812
Robert Giardina (6)............. 44,052 3.4% -- -- 32,793
Richard Pyle (6)................ 37,597 2.9% -- -- 27,569
Alexander Alimanestianu (6)..... 37,140 2.8% -- -- 27,199
Deborah Smith (6)............... 14,946 1.1% -- -- 10,080
Bruce C. Bruckmann (7).......... 517,642 39.6% -- 107,057 --
Stehpen Edwards (8)............. 504,456 38.6% -- 104,330 --
Jason Fish (9).................. 270,091 20.7% 20,000 41,045 --
Paul Arnold..................... * * -- 591 --
Keith Alessi.................... * * -- 591 --
EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP:
10 Persons (10)................. 983,614 75.3% 20,000 149,284 140,453
</TABLE>
- ------------------------
* Represents less than 1%.
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of March 15, 1999 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purposes of computing
the percentage ownership of any other person.
(2) Excludes shares held individually by Mr. Bruckmann and other individuals
(and affiliates and family members thereof), each of whom are employed by
BRS.
(3) Includes shares held by each of Farallon Capital Partners, L.P., Farallon
Capital Institutional Partners, L.P., Farallon Capital Institutional
Partners II, L.P. and R.R. Capital Partners, L.P. (the "Farallon Entities").
Farallon Partners, L.L.C. is the general partner of each of the Farallon
Entities. Farallon Partners, L.L.C. disclaims beneficial ownership of such
shares. Also includes warrants to purchase 71,360 shares of Common Stock
with an exercise price of $.01 per share and an expiration date of November
30, 2008.
(4) Includes a warrant to purchase 75,714 shares of Common Stock with an
exercise price of $.01 per share and an expiration date of December 10, 2006
and warrants to purchase 53,723 shares of Common Stock with an exercise
price of $.01 and an expiration date of November 15, 2008.
30
<PAGE>
(5) Includes warrants to purchase 17,908 shares of Common Stock with an exercise
price of $.01 per share and an expiration date of November 30, 2008
(6) Includes options to acquire, exercisable within 60 days, Common Stock, and
Series B Preferred Stock options, exercisable within 60 days, pursuant to
the Old Option Plan and the Preferred Option Plan, respectively. Messrs.
Smith, Giardina, Pyle, Alimanestianu and Ms. Smith each hold such options on
8,830, 8,829, 8,828, 8,828 and 5,430 shares of Common Stock, respectively.
All shares of Series B Preferred Stock beneficially owned by such persons
are in the form of Series B Options, except with respect to Ms. Smith only,
9,530 shares are in the form of Series B Options. The address for each of
these named executive officers is the same as the address of the Company's
principal executive offices
(7) Includes 504,456 shares held by BRS, and approximately 2,276 shares held by
certain other family members of Mr. Bruckmann. Mr. Bruckmann disclaims
beneficial ownership of such shares held by BRS.
(8) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
such shares.
(9) Includes shares held by each of the Farallon Entities. Mr. Fish is a
managing member of Farallon Partners, L.L.C., which is the general partner
of each of the Farallon Entities. Mr. Fish disclaims beneficial ownership of
such shares.
(10) Includes (i) shares held by BRS, which may be deemed to be owned
beneficially by Messrs. Bruckmann and Edwards, and (ii) shares held by the
Farallon Entities, which may be deemed to be owned beneficially by Mr. Fish.
Excluding the shares beneficially owned by BRS and the Farallon Entities,
the directors and named executive offices as a group beneficially own (i)
209,067 shares of Common Stock (which represents approximately 16.0% of the
Common Stock on a fully diluted basis), (ii) no shares of Redeemable Senior
Preferred Stock, (iii) 3,909 shares of Series A Preferred Stock, and (iv)
140,453 shares of Series B Preferred Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE RECAPITALIZATION
In December 1996, the Company consummated the Recapitalization pursuant to
which, among other things: (i) all shares of the Company's preferred stock
outstanding prior to the Recapitalization were redeemed or converted into shares
of the Company's then authorized common stock ("Old Common Stock"); (ii) all
shares of Old Common Stock (other than shares held by certain members of the
Company's management team) were exchanged for cash; and (iii) BRS and the
Farallon Entities acquired shares of the Company's Common Stock and Series A
Preferred Stock, representing approximately 73.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, certain members of the
Company's management acquired shares of the Company's Common Stock and Series B
Preferred Stock representing approximately 27.0% of the Company's voting equity
interests on a fully-diluted basis. In addition, pursuant to the
Recapitalization, the Company instituted the Old Option Plan and the Preferred
Option Plan, which granted certain members of the Company's management, options
to acquire the Company's Common Stock and Series B Options, respectively.
REDEEMABLE SENIOR PREFERRED STOCK
In November 1998, the Company issued 40,000 shares of Redeemable Senior
Preferred Stock ("Senior"). After the payment of fees and expenses of
approximately $400,000 the Company received net proceeds of approximately $39.6
million. The Senior stock is redeemable in November 2008. The Senior stock may,
at the option of the holder, be converted into Common stock upon the initial
public offering of common stock of the Company.
REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization, the Company, BRS, the Farallon
Entities, Canterbury Mezzanine Capital, L.P. ("CMC"), certain members of
management and other shareholders of the Company entered into a Registration
Rights Agreement, dated December 10, 1996 (as amended on November 13, 1998, in
connection with the issuance of Senior Preferred Stock, the "Registration Rights
Agreement"). Pursuant to the terms of the Registration Rights Agreement, BRS,
the Farallon Entities and CMC have the right to require the Company, at the
expense of the Company and subject to certain limitations, to register under the
Securities Act all or part of the shares of Common Stock (the "Registrable
Securities")
31
<PAGE>
held by them. BRS is entitled to demand up to three long-form registrations at
any time and unlimited short-form registrations. Farallon is entitled to demand
one long-form registration (but only one year after the Company has consummated
an initial registered public offering of its Common Stock) and up to three
short-form registrations. CMC is entitled to demand up to two short-form
registrations.
All holders of Registrable Securities are entitled to an unlimited number of
"piggyback" registrations, with the Company paying all expenses of the Offering,
whenever the Company proposes to register its Common Stock under the Securities
Act. Each such holder is subject to certain pro rata limitations on its ability
to participate in such a "piggyback" registration. In addition, pursuant to the
Registration Rights Agreement, the Company has agreed to indemnify all holders
of Registrable Securities against certain liabilities, including certain
liabilities under the Securities Act.
PROFESSIONAL SERVICES AGREEMENT AND TRANSACTION FEES
In connection with the Recapitalization, Bruckmann, Rosser, Sherrill & Co.,
Inc. ("BRS Co."), an affiliate of BRS, and the Company entered into a
Professional Services Agreement, whereby BRS Co. agreed to provide certain
advisory and consulting services to the Company. In exchange for such services,
BRS Co. receives an annual fee of $250,000 per calendar year while they own at
least 20.0% of the outstanding Common Stock of the Company. The Company also
paid BRS Co. and the Farallon Entities transaction fees of $584,000 and
$216,000, respectively for investment banking advisory services rendered to the
Company in connection with the Recapitalization.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 15, 1999.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ MARK SMITH
-----------------------------------------
Mark Smith
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ MARK SMITH
-----------------------------------------
Mark Smith
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ RICHARD PYLE
-----------------------------------------
Richard Pyle
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
By: /s/ KEITH ALESSI
-----------------------------------------
Keith Alessi
DIRECTOR
By: /s/ PAUL ARNOLD
-----------------------------------------
Paul Arnold
DIRECTOR
By: /s/ BRUCE BRUCKMANN
-----------------------------------------
Bruce Bruckmann
DIRECTOR
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
By: /s/ STEPHEN EDWARDS
-----------------------------------------
Stephen Edwards
DIRECTOR
By: /s/ JASON FISH
-----------------------------------------
Jason Fish
DIRECTOR
</TABLE>
34
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Document List
1. Financial Statements
The following consolidated financial statements of the Company are included
in Item 8:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants.......................................................................... F-1
Consolidated balance sheets at May 31, 1997, 1998 and December 31, 1998.................................... F-2
Consolidated statements of operations for the years ended May 31, 1996, 1997, 1998, and the seven months
ended December 31, 1997 (Unaudited) and 1998............................................................. F-3
Consolidated statements of stockholders' equity (deficit) for the years ended May 31, 1996, 1997,1998, and
the seven months ended December 31, 1998................................................................. F-4
Consolidated statements of cash flows for the years ended May 31, 1996, 1997, 1998, and the seven months
ended December 31, 1997 (Unaudited) and 1998............................................................. F-5
Notes to consolidated financial statements................................................................. F-6
2. Financial Statement Schedule includes:
Report of independent accountants.......................................................................... F-26
Schedule II, Valuation and Qualifying Accounts............................................................. F-27
</TABLE>
(b) Reports on Form 8-K
The Company filed reports on Form 8-K on January 8, 1999 and on August 26,
1998.
(c) Exhibits:
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among the Company,
various Sellers and Option Holders and TSI Recapitalization Sub, Inc.+
2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., the Company and certain stockholders and option holders of the
Company.+
3.1 Amended and Restated Certificate of Incorporation of the Company.+
3.2 By-Laws of the Company.+
3.3 Certificate of Amendment of the Certificate of Incorporation of the Company, dated
as of November 13, 1998.
4.1 Indenture dated as of October 16, 1997 between the Company and United States Trust
Company of New York.+
4.2 Purchase Agreement dated as of October 9, 1997 among the Company and BT Alex. Brown
Incorporated.+
4.3 Registration Rights Agreement dated as of October 16, 1997 among the Company, and
BT Alex. Brown Incorporated.+
4.4 Registration Rights Agreement dated as of December 10, 1996 by and among the
Company, BRS and various investors, the Farallon Entities, CMC, and certain Town
Sports stockholders.+
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
4.5 First Amendment to Registration Rights Agreement by and among the Company, BRS,
CMC, Canterbury Detroit Partners L.P. "CDP", Rosewood Capital Partners L.P. "RC",
the Farallon Entities and certain other stockholders of the Company, dated as of
November 13, 1998.
10.1 Amended and Restated Credit Agreement among the Company, Various Lending
Institutions and Bankers Trust Company, as Administrative Agent dated as of October
16, 1997.+
10.2 First Amendment to the Amended and Restated Credit Agreement among the Company,
various Lending Institutions and Bankers Trust Company, as Administrative Agent
dated as of August 6, 1998.*
10.3 Stock Purchase Agreement among the Company, CMC and CDP, dated as of November 13,
1998.
10.4 Stock Purchase Agreement among the Company, the Farallon Entities and RC, dated as
of November 30, 1998.
10.5 Shareholders' Agreement dated as of December 10, 1996 by and among the Company,
BRS, the Farallon Entities, CMC and certain other stockholders of the Company.+
10.6 Amended and Restated Shareholders' Agreement among the Company, BRS, the Farallon
Entities, RC, CMC, and CDP, dated as of November 13, 1998.
21.1 Subsidiaries of the Company.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Incorporated by reference to the Registrant's Registration Statement on Form
S-4, File No. 333-40907.
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 333-61439.
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
New York, New York
February 16, 1999
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of TOWN
SPORTS INTERNATIONAL, INC. and SUBSIDIARIES at May 31, 1997 and 1998 and
December 31, 1998, and the results of their operations and their cash flows for
each of the three years ended May 31, 1996, 1997 and 1998 and for the seven
months ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 2n to the consolidated financial statements, the
Company changed its method of accounting for organizational costs effective June
1, 1997.
PRICEWATERHOUSECOOPERS LLP
F-1
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ALL FIGURES $'000, EXCEPT SHARE DATA
MAY 31, 1997, 1998 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
--------------------- --------------
1997 1998 1998
--------- ---------- --------------
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents............................................... $ 2,468 $ 22,997 $ 19,154
Accounts receivable..................................................... 312 420 628
Inventory............................................................... 327 673 1,253
Prepaid expenses and other current assets............................... 493 677 1,205
Prepaid corporate income taxes.......................................... 202 -- --
--------- ---------- --------------
Total current assets.................................................. 3,802 24,767 22,240
Fixed assets, net......................................................... 34,214 54,518 81,426
Intangible assets, net.................................................... 4,425 19,923 37,064
Deferred tax asset........................................................ 5,972 7,159 8,570
Deferred membership costs................................................. 3,530 4,933 7,005
Other assets.............................................................. 980 677 1,111
--------- ---------- --------------
Total assets.......................................................... $ 52,923 $ 111,977 $ 157,416
--------- ---------- --------------
--------- ---------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations......... $ 1,924 $ 2,036 $ 2,191
Accounts payable........................................................ 1,802 2,451 3,711
Accrued expenses........................................................ 4,017 7,869 6,305
Corporate income taxes payable.......................................... -- 122 62
Deferred revenue........................................................ 4,599 6,391 9,493
--------- ---------- --------------
Total current liabilities............................................. 12,342 18,869 21,762
Long-term debt and capital lease obligations.............................. 39,147 86,253 87,333
Deferred lease liabilities................................................ 6,625 9,298 10,791
Deferred revenue.......................................................... 1,036 1,890 2,446
Other liabilities......................................................... 724 774 682
--------- ---------- --------------
Total liabilities..................................................... 59,874 117,084 123,014
--------- ---------- --------------
Commitments and contingencies (Notes 6, 7, 8 and 13)
Redeemable senior preferred stock, $1.00 par value; liquidation value
$40,488; authorized 100,000 shares; no shares issued and outstanding at
May 31, 1997 and 1998, 40,000 shares at December 31, 1998............... -- -- 36,735
--------- ---------- --------------
Stockholders' deficit:
Series A preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares; issued and outstanding 152,455 shares at
May 31, 1997, 153,637 shares at May 31, 1998 and December 31, 1998.... 16,250 18,736 20,351
Series B preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares; issued and outstanding 3,857 shares at May
31, 1997, 1998 and December 31,1998................................... 144 164 179
Class A voting common stock, $.001 par value; authorized 2,500,000
shares; issued and outstanding 1,010,000 shares at May 31, 1997,
1,015,714 shares at May 31, 1998 and December 31, 1998................ 1 1 1
Paid-in capital......................................................... -- 3,994 7,844
Unearned compensation................................................... -- (2,546) (2,546)
Accumulated deficit..................................................... (23,346) (25,456) (28,162)
--------- ---------- --------------
Total stockholders' deficit........................................... (6,951) (5,107) (2,333)
--------- ---------- --------------
Total liabilities and stockholders' deficit........................... $ 52,923 $ 111,977 $ 157,416
--------- ---------- --------------
--------- ---------- --------------
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
ALL FIGURES $'000
FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
AND THE SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998
--------- --------- --------- ------------ ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Club operations....................................... $ 40,796 $ 54,164 $ 79,719 $ 41,490 $ 69,964
Management fees and other............................. 2,959 2,403 2,631 1,500 1,698
--------- --------- --------- ------------ ---------
43,755 56,567 82,350 42,990 71,662
--------- --------- --------- ------------ ---------
Operating expenses:
Payroll and related................................... 18,626 23,321 33,309 17,621 28,001
Club operating........................................ 14,542 18,044 25,858 13,258 24,261
General and administrative............................ 3,562 3,774 5,825 2,742 5,828
Depreciation and amortization......................... 2,929 4,219 7,736 3,944 8,818
Compensation expense incurred in connection with stock
options............................................. 1,967 5,933 1,442 397 434
--------- --------- --------- ------------ ---------
41,626 55,291 74,170 37,962 67,342
--------- --------- --------- ------------ ---------
Operating income.................................... 2,129 1,276 8,180 5,028 4,320
Interest expense, net of interest income of $60, $115,
$1,228, $526 and $272, respectively................... 952 2,455 5,902 3,270 5,279
--------- --------- --------- ------------ ---------
Income (loss) before provision (benefit) for
corporate income taxes............................ 1,177 (1,179) 2,278 1,758 (959)
Provision (benefit) for corporate income taxes.......... 628 (243) 1,131 888 (399)
--------- --------- --------- ------------ ---------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
policy............................................ 549 (936) 1,147 870 (560)
Extraordinary loss from early extinguishment of debt,
net of income tax benefit of $624..................... -- -- (782) (782) --
--------- --------- --------- ------------ ---------
Income (loss) before cumulative effect of change in
accounting policy................................. 549 (936) 365 88 (560)
Cumulative effect on prior years of a change in
accounting for club organizational costs, net of
income tax benefit of $70............................. -- -- (88) (88) --
--------- --------- --------- ------------ ---------
Net income (loss)................................... 549 (936) 277 -- (560)
Accreted dividends on preferred stock................... (400) (1,286) (2,387) (1,485) (2,146)
--------- --------- --------- ------------ ---------
Net income (loss) attributable to common
stockholders...................................... $ 149 $ (2,222) $ (2,110) $ (1,485) $ (2,706)
--------- --------- --------- ------------ ---------
--------- --------- --------- ------------ ---------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ALL FIGURES $'000, EXCEPT SHARE DATA
FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
AND THE SEVEN MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------------------------------------
SERIES A ($1.00 SERIES A ($.10 SERIES B ($1.00
PAR) PAR) PAR)
---------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995..................................... 496
Issuance of Class A Common Stock............................
Issuance of Class A and B Common Stock......................
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)...............................
Compensation expense incurred in connection with stock
options...................................................
Net income..................................................
------ -------
Balance at May 31, 1996................................... 496
Liquidation of Series A Preferred Stock, for $1,000 per
share, redemption of Class A and B Common Stock for a cash
price of $35 per share and change in equity related to
exercise of stock options................................. (496)
Issuance of Series A and B Preferred and Common Stock at
cash price of $100, $35 and $1, respectively.............. 152,455 $15,245 3,857 $135
Warrant exercise at $.01 per share..........................
Original issue discount in connection with the issuance of
warrants and subordinated debt............................
Compensation expense incurred in connection with common
stock options.............................................
Compensation expense incurred in connection with Series B
Preferred Stock options...................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively)................. 1,005 9
Net loss....................................................
------- ------- ------ ------- ------ ------
Balance at May 31, 1997................................... 152,455 16,250 -- -- 3,857 144
------ -------
------ -------
Issuance of Series A Preferred Stock and Class A Common
Stock..................................................... 1,182 119
Unearned Compensation incurred in connection with common
stock options.............................................
Amortization of unearned compensation.......................
Compensation expense incurred in connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($15.14 and $5.44 per share, respectively)................ 2,367 20
Net income..................................................
------- ------- ------ ------
Balance at May 31, 1998................................... 153,637 18,736 3,857 164
Warrant issuance in connection with Redeemable Senior
Preferred Stock...........................................
Compensation expense incurred with connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($10.51 and $3.89 per share, respectively)................ 1,615 15
Accretion of redeemable senior preferred stock dividend
($12.20 per share plus accretion to liquidation value)....
Net loss....................................................
------- ------- ------ ------
Balance at December 31, 1998.............................. 153,637 $20,351 3,857 $179
------- ------- ------ ------
------- ------- ------ ------
<CAPTION>
COMMON STOCK
------------------------------------------------------
CLASS A ($.001 CLASS A ($.01 CLASS B
PAR) PAR) CONVERTIBLE
----------------- ---------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ -------- ------ ------ -------
<S> <C> <C> <C> <C>
Balance at May 31, 1995..................................... 475,000 $ 5
Issuance of Class A Common Stock............................ 87,948 1
Issuance of Class A and B Common Stock...................... 13,358 2,351
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)...............................
Compensation expense incurred in connection with stock
options...................................................
Net income..................................................
--
-------- ------ -------
Balance at May 31, 1996................................... 576,306 6 2,351
Liquidation of Series A Preferred Stock, for $1,000 per
share, redemption of Class A and B Common Stock for a cash
price of $35 per share and change in equity related to
exercise of stock options................................. (576,306) (6) (2,351)
Issuance of Series A and B Preferred and Common Stock at
cash price of $100, $35 and $1, respectively.............. 1,000,000 $1
Warrant exercise at $.01 per share.......................... 10,000
Original issue discount in connection with the issuance of
warrants and subordinated debt............................
Compensation expense incurred in connection with common
stock options.............................................
Compensation expense incurred in connection with Series B
Preferred Stock options...................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively).................
Net loss....................................................
-- --
--------- -------- ------ -------
Balance at May 31, 1997................................... 1,010,000 1 -- -- -- --
--
--
-------- ------ -------
-------- ------ -------
Issuance of Series A Preferred Stock and Class A Common
Stock..................................................... 5,714 --
Unearned Compensation incurred in connection with common
stock options............................................. 3,352
Amortization of unearned compensation.......................
Compensation expense incurred in connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($15.14 and $5.44 per share, respectively)................
Net income..................................................
--
---------
Balance at May 31, 1998................................... 1,015,714 1
Warrant issuance in connection with Redeemable Senior
Preferred Stock...........................................
Compensation expense incurred with connection with Series B
Preferred stock options...................................
Accretion of Series A and Series B preferred stock dividend
($10.51 and $3.89 per share, respectively)................
Accretion of redeemable senior preferred stock dividend
($12.20 per share plus accretion to liquidation value)....
Net loss....................................................
--
---------
Balance at December 31, 1998.............................. 1,015,714 $1
--
--
---------
---------
<CAPTION>
(ACCUMULATED
DEFICIT) TOTAL
PAID-IN UNEARNED RETAINED STOCKHOLDERS'
CAPITAL COMPENSATION EARNINGS EQUITY (DEFICIT)
-------- ------------ ------------ ----------------
Balance at May 31, 1995..................................... $ 1,788 $ 193 $ 1,986
Issuance of Class A Common Stock............................ 1,371 1,372
Issuance of Class A and B Common Stock...................... 144 144
Accretion of Series B redeemable convertible preferred stock
dividends ($1.22 per share)............................... (400) (400)
Compensation expense incurred in connection with stock
options................................................... 1,823 1,823
Net income.................................................. 549 549
-------- ------------ -------
Balance at May 31, 1996................................... 5,126 342 5,474
Liquidation of Series A Preferred Stock, for $1,000 per
share, redemption of Class A and B Common Stock for a cash
price of $35 per share and change in equity related to
exercise of stock options................................. (11,228) (21,466) (32,700)
Issuance of Series A and B Preferred and Common Stock at
cash price of $100, $35 and $1, respectively.............. (226) 15,155
Warrant exercise at $.01 per share..........................
Original issue discount in connection with the issuance of
warrants and subordinated debt............................ 123 123
Compensation expense incurred in connection with common
stock options............................................. 5,660 5,660
Compensation expense incurred in connection with Series B
Preferred Stock options................................... 273 273
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively)................. 272 (1,286)
Net loss.................................................... (936) (936)
-------- ------------ -------
Balance at May 31, 1997................................... (23,346) (6,951)
Issuance of Series A Preferred Stock and Class A Common
Stock..................................................... 6 125
Unearned Compensation incurred in connection with common
stock options............................................. (3,352)
Amortization of unearned compensation....................... 806 806
Compensation expense incurred in connection with Series B
Preferred stock options................................... 636 636
Accretion of Series A and Series B preferred stock dividend
($15.14 and $5.44 per share, respectively)................ (2,387)
Net income.................................................. 277 277
-------- ------------ ------------ -------
Balance at May 31, 1998................................... 3,994 (2,546) (25,456) (5,107)
Warrant issuance in connection with Redeemable Senior
Preferred Stock........................................... 3,416 3,416
Compensation expense incurred with connection with Series B
Preferred stock options................................... 434 434
Accretion of Series A and Series B preferred stock dividend
($10.51 and $3.89 per share, respectively)................ (1,630)
Accretion of redeemable senior preferred stock dividend
($12.20 per share plus accretion to liquidation value).... (516) (516)
Net loss.................................................... (560) (560)
-------- ------------ ------------ -------
Balance at December 31, 1998.............................. $ 7,844 $(2,546) $(28,162) $(2,333)
-------- ------------ ------------ -------
-------- ------------ ------------ -------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALL FIGURES $'000
FOR THE YEARS ENDED MAY 31, 1996, 1997, 1998
AND THE SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) AND 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1997 1998
--------- --------- --------- ------------ ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ 549 $ (936) $ 277 $ -- $ (560)
--------- --------- --------- ------------ ---------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Compensation expense incurred in connection with stock
options............................................. 1,967 5,933 1,442 397 434
Depreciation and amortization......................... 2,929 4,219 7,736 3,944 8,818
Amortization of debt issuance costs................... -- 156 412 245 363
Losses from extinguishment of debt.................... -- -- 1,406 1,377 --
Write-off of organization costs....................... -- -- 158 158 --
Noncash rental expense, net of noncash rental
income.............................................. 1,277 1,620 2,670 1,354 1,493
Change in certain working capital components.......... 1,216 4,389 4,316 1,620 204
Increase in deferred tax asset........................ (1,539) (2,058) (1,187) (1,081) (1,411)
Increase in deferred membership costs................. (926) (847) (1,403) (708) (2,072)
Other................................................. 222 (174) (94) (113) 124
--------- --------- --------- ------------ ---------
Total adjustments..................................... 5,146 13,238 15,456 7,193 7,953
--------- --------- --------- ------------ ---------
Net cash provided by operating activities............. 5,695 12,302 15,733 7,193 7,393
Cash flows from investing activities:
Capital expenditures, net of effect of acquired
businesses............................................ (5,380) (11,403) (16,170) (5,304) (21,815)
Acquisition of businesses............................... (35) (1,888) (19,733) (7,058) (25,103)
Intangible and other assets............................. (72) (280) (137) -- (434)
--------- --------- --------- ------------ ---------
Net cash used in investing activities................. (5,487) (13,571) (36,040) (12,362) (47,352)
--------- --------- --------- ------------ ---------
Cash flows from financing activities:
Issuance of stock, net of expenses...................... 2,000 15,155 125 125 --
Issuance of Senior Preferred Stock, net of expenses..... -- -- -- -- 39,635
Redemption and liquidation of stock, including
expenses.............................................. -- (38,820) -- -- --
Proceeds from borrowings, net of expenses............... 5,365 40,081 85,841 85,570 16,975
Repayments of borrowings................................ (7,221) (13,607) (45,130) (43,334) (20,494)
--------- --------- --------- ------------ ---------
Net cash provided by financing activities............. 144 2,809 40,836 42,361 36,116
--------- --------- --------- ------------ ---------
Net (decrease) increase in cash and cash
equivalents......................................... 352 1,540 20,529 37,192 (3,843)
Cash and cash equivalents at beginning of period.......... 576 928 2,468 2,468 22,997
--------- --------- --------- ------------ ---------
Cash and cash equivalents at end of period............ $ 928 $ 2,468 $ 22,997 $ 39,660 $ 19,154
--------- --------- --------- ------------ ---------
--------- --------- --------- ------------ ---------
Summary of the change in certain working capital
components, net of effects of acquired businesses:
(Increase) decrease in accounts receivable............ $ (19) $ 469 $ (108) $ 69 $ (208)
Increase in inventory................................. (135) (39) (343) (323) (580)
(Increase) decrease in prepaid expenses and other
current assets...................................... (38) 631 30 (18) (336)
Increase (decrease) in accounts payable and accrued
expenses............................................ 805 2,055 1,895 981 (2,330)
(Decrease) increase in prepaid corporate income
taxes............................................... (913) 156 324 -- --
Increase in deferred revenue.......................... 1,516 1,117 2,518 911 3,658
--------- --------- --------- ------------ ---------
Net change in certain working capital components.... $ 1,216 $ 4,389 $ 4,316 $ 1,620 $ 204
--------- --------- --------- ------------ ---------
--------- --------- --------- ------------ ---------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALL FIGURES $'000, EXCEPT SHARE DATA
1. NATURE OF BUSINESS:
Town Sports International, Inc. and Subsidiaries (the "Company") owns,
operates or manages 55 fitness clubs ("clubs") in the New York metropolitan
market, eight clubs in Washington, D.C., four clubs in Boston, and two clubs in
Switzerland as of December 31, 1998. The Company's geographic concentration in
the New York metropolitan market may expose the Company to adverse developments
related to competition, demographic changes, real estate costs and economic down
turns. The Company operates in a single segment as defined by Statement of
Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION.
On December 10, 1996, the Company completed a restructuring of its ownership
and debt capitalization. The restructuring was undertaken to increase
stockholder value by providing access to growth capital and financial advisory
skills thereby enabling the Company to optimize its competitive advantage in the
market place, and to present certain existing equity holders the opportunity to
diversify their respective equity interests in the Company. The restructuring
was accounted for as a leveraged recapitalization whereby new investors, on a
fully-diluted basis, effectively acquired 73% of the Company resulting in a
reduction of equity of $32,700. The reduction in equity included the liquidation
of Series A Preferred Stock of $496, and the redemption of stock and stock
options outstanding immediately prior to the recapitalization of $28,025 and
$4,179, respectively. In addition, 368,333 shares of Series B Redeemable
Preferred Stock, which had been accounted for as mezzanine financing, were
redeemed at a cost of $6,121. New and existing investors acquired newly
constituted preferred and common stock. Closing fees paid to certain new
investors totaled approximately $800. Senior and subordinated debt facilities
were obtained to finance the repayment of existing bank facilities and to
provide growth capital.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A. PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts of
Town Sports International, Inc. and all wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
B. CHANGE IN YEAR END:
On January 7, 1999, the Company's board of directors approved a change in
the Company's fiscal year end from May 31 to December 31, effective beginning
with the seven month period ended December 31, 1998 ("the transition period").
C. REVENUE RECOGNITION:
The Company receives a one-time non-refundable initiation fee and monthly
dues from its members. Substantially all of the Company's members join on a
month-to-month basis and can therefore cancel their membership at any time with
30 days notice. Initiation fees and related direct expenses, primarily salaries
and sales commissions payable to membership consultants, are deferred and
recognized, on a straight-line basis, in operations over an estimated membership
period of twenty four (24) months. Dues that are received in advance are
recognized on a pro-rata basis over the periods in which services are to be
provided.
F-6
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $1,975, pursuant to various state consumer
protection laws.
Management fees earned for services rendered are recognized at the time the
related services are performed.
The Company recognizes revenue from merchandise sales upon delivery to the
member.
D. INVENTORY:
Inventory consists primarily of athletic equipment and supplies for sale to
members and club supplies. Inventories are valued at the lower of cost or market
by the first-in, first-out method.
E. FIXED ASSETS:
Fixed assets are recorded at cost and depreciated on a straight-line basis
over the estimated useful lives of the assets, which are thirty years for
building and improvements, five years for club equipment, furniture, fixtures
and computer equipment, and three years for proprietary computer software.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the remaining period of the lease. Expenditures for maintenance and
repairs are charged to operations as incurred. The cost and related accumulated
depreciation or amortization of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in operations.
F. ADVERTISING AND CLUB PREOPENING COSTS
Advertising costs and club preopening costs are charged to operations during
the period in which they are incurred. Total advertising costs incurred by the
Company during the years ended May 31, 1996, 1997, 1998 and the seven months
ended December 31, 1998 totaled $1,291, $1,627, $2,147 and $2,081, respectively.
G. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
The most significant assumptions and estimates relate to the useful lives
and recoverability of fixed and intangible assets, deferred income tax
valuation, valuation of and expense incurred in connection with stock options
and warrants and the estimated membership period.
H. CORPORATE INCOME TAXES:
Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined on the basis of the difference between the financial statement and
tax bases of assets and liabilities ("temporary differences") at enacted tax
rates in effect for the years in which
F-7
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
the temporary differences are expected to reverse. A valuation allowance is
recorded if it is more likely than not that all or part of a deferred tax asset
will not be realized.
I. STATEMENTS OF CASH FLOWS:
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEARS ENDED MAY 31, DECEMBER 31,
------------------------------- -----------------------
1996 1997 1998 1997 1998
--------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash paid for:
Interest (net of amounts capitalized)........................... $ 1,118 $ 1,603 $ 6,798 $ 2,430 $ 4,705
Taxes........................................................... 3,080 1,655 1,300 455 1,072
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts payable........ 293 850 2,496 99 1,966
Acquisition of equipment financed by suppliers or lessors......... 1,475 1,411 562 261 --
See Notes 9 and 10 for additional noncash investing and financing
activities.
</TABLE>
J. CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments which have
maturities of three months or less when acquired to be cash equivalents. The
carrying amounts reported in the balance sheets for cash and cash equivalents
approximate fair value.
K. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE:
The Company recognizes rental expense for leases with scheduled rent
increases on the straight-line basis over the life of the lease.
L. FOREIGN CURRENCY:
Transactions denominated in a foreign currency have been translated into
U.S. dollars at the rates of exchange at the transaction dates. Assets and
liabilities have been translated at the respective year-end exchange rates. For
the years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998, the Company recognized foreign exchange gains (losses) of approximately
$20, ($65), ($3) and $1, respectively. These gains (losses) relate to certain
management fees earned in Switzerland.
M. INVESTMENTS IN AFFILIATED COMPANIES:
The Company has investments in Capitol Hill Squash Club Associates and
Kalorama Sports Management Associates (collectively referred to as the
"Affiliates"). The Affiliates have operations, which are similar, or related to,
those of the Company. The Company accounts for these Affiliates in accordance
with the equity method. The assets, liabilities, equity and operating results of
the Affiliates and the
F-8
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Company's pro rata share of the Affiliates' net assets and operating results
were not material for all periods presented.
N. INTANGIBLE ASSETS:
Intangible assets consist of acquired leasehold rights, membership lists,
debt issuance costs, goodwill and covenants-not-to-compete. Such intangibles are
stated at cost and, except debt issuance costs, are being amortized by the
straight-line method over their estimated lives. Debt issuance costs are
amortized as additional interest expense over life of the underlying debt using
the interest method. Effective June 1, 1997, the Company changed the estimated
useful lives of membership lists from three to two years. The effect on
operating results for the year ended May 31, 1998 of decreasing the useful life
was to increase amortization expense by $234, $117 net of taxes. Goodwill and
acquired leasehold rights are being amortized over the remaining lives of the
respective leases, five to fifteen years, and debt issuance costs are being
amortized over the term of the respective borrowings, five to seven years.
Prior to the year ended May 31, 1998, the Company capitalized direct costs
(legal fees and real-estate commissions) incurred to obtain leases for new clubs
to be constructed by the Company ("Organizational Costs"). Such amounts were
amortized over a five year period using the straight-line method. During the
quarter ended May 31, 1998, the Company adopted the provisions of Statement of
Position 98-5 REPORTING ON THE COSTS OF START-UP ACTIVITIES ("SOP 98-5") which
requires that Organizational Costs be expensed as incurred. In connection with
the adoption of SOP 98-5, the Company restated its first-quarter operating
results as if adoption had occurred on June 1, 1997 and recorded a pre-tax
charge of $158, $88 net of taxes, as the cumulative effect of this accounting
change.
O. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets, such as fixed assets and intangible assets, including
goodwill, are reviewed for impairment when events or circumstances indicate that
their carrying value may not be recoverable. Estimated undiscounted expected
future cash flows are used to determine if an asset is impaired in which case
the asset's carrying value would be reduced to fair value. For all periods
presented, no impairment losses were recorded.
P. CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk are cash and cash equivalents. Such amounts are
held, primarily, in a single commercial bank. The Company holds no collateral
for these financial instruments.
Q. STOCK-BASED EMPLOYEE COMPENSATION:
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method ("APB No. 25"). In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Company's stock is
not greater than the amount an employee must pay to acquire the stock as
defined; however, to the extent that stock options are granted to employees with
F-9
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
variable terms or if the fair value of the Company's stock as of the measurement
date is greater than the amount an employee must pay to acquire the stock, then
the Company will recognize compensation expense. However, the fair value of
options or warrants granted to nonemployees for financing are included in
operating results as an expense.
Disclosures, including pro forma operating results had the Company prepared
its financial statements in accordance with the fair value based method of
accounting for stock-based compensation, have been included in Note 9.
R. OTHER RECENT ACCOUNTING PRONOUNCEMENTS:
During the transition period, the Company adopted the provisions of
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the
Company to capitalize certain costs incurred in connection with developing
software to be used internally. The amounts capitalized during the period were
$558.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS No. 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. SFAS No. 133 standardizes the accounting for derivative instruments
by requiring that all derivatives be recognized as assets and liabilities and
measured at fair value. This statement is effective for fiscal years beginning
after June 15, 1999. Based on current estimates, management does not believe
that the future adoption of SFAS No. 133 will have an effect on the Company's
financial statements.
3. FIXED ASSETS:
Fixed assets as of May 31, 1997, 1998 and December 31, 1998, are shown at
cost, less accumulated depreciation and amortization, and are summarized below:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- --------------
1997 1998 1998
--------- --------- --------------
<S> <C> <C> <C>
Leasehold improvements.................................................... $ 26,309 $ 39,029 $ 58,835
Club equipment............................................................ 8,581 13,394 19,984
Furniture, fixtures and computer equipment................................ 5,171 6,841 10,794
Building and improvements................................................. 4,995 4,995 4,995
Land...................................................................... 986 986 986
Construction in progress.................................................. 1,284 6,937 8,488
--------- --------- --------------
47,326 72,182 104,082
Less, Accumulated depreciation and amortization......................... 13,112 17,664 22,656
--------- --------- --------------
$ 34,214 $ 54,518 $ 81,426
--------- --------- --------------
--------- --------- --------------
</TABLE>
Depreciation and leasehold amortization expense for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998 was approximately
$2,813, $3,843, $6,130 and $5,664, respectively.
F-10
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
4. INTANGIBLE ASSETS:
Intangible assets as of May 31, 1997, 1998 and December 31, 1998 are shown
at cost, less accumulated amortization, and are summarized below:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- --------------
1997 1998 1998
--------- --------- --------------
<S> <C> <C> <C>
Goodwill arising on acquisition of businesses............................... $ 2,798 $ 14,755 $ 32,627
Membership lists............................................................ 176 3,154 5,712
Deferred financing costs.................................................... 2,150 4,103 4,203
Covenants-not-to-compete.................................................... -- 400 550
Organizational expenses..................................................... 158 -- --
--------- --------- --------------
5,282 22,412 43,092
Less, Accumulated amortization............................................ 857 2,489 6,028
--------- --------- --------------
$ 4,425 $ 19,923 $ 37,064
--------- --------- --------------
--------- --------- --------------
</TABLE>
Amortization expense of intangible assets for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998 was approximately $116,
$532, $2,018 and $3,517, respectively. Such amount includes amortization expense
of deferred financing costs of $0, $156, $412 and $363, respectively, which has
been classified as interest expense for financial reporting purposes.
5. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- --------------
1997 1998 1998
--------- --------- --------------
<S> <C> <C> <C>
Accrued payroll.............................................................. $ 1,882 $ 3,359 $ 2,210
Accrued interest............................................................. 839 1,171 2,017
Accrued other................................................................ 1,296 2,089 2,078
Amounts payable under agreement to purchase a club........................... -- 1,250 --
--------- --------- -------
$ 4,017 $ 7,869 $ 6,305
--------- --------- -------
--------- --------- -------
</TABLE>
F-11
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- --------------
1997 1998 1998
--------- --------- --------------
<S> <C> <C> <C>
Series B 9-3/4% Senior Notes, due 2004.................................... -- $ 85,000 $ 85,000
Term Loan................................................................. $ 30,000 -- --
Subordinated note payable--face value of $7,500. Note shown net of
original issue discount arising out of issuance of warrants to buy
common stock............................................................ 7,384 -- --
Notes payable for acquired business....................................... 1,370 1,826 3,739
Capital lease obligations................................................. 2,317 1,463 785
--------- --------- --------------
41,071 88,289 89,524
Less, Current portion due within one year............................... 1,924 2,036 2,191
--------- --------- --------------
Long-term portion......................................................... $ 39,147 $ 86,253 $ 87,333
--------- --------- --------------
--------- --------- --------------
</TABLE>
The aggregate long-term debt and capital lease obligations maturing during
the next five years and thereafter is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT DUE
- ------------------------------------------------------------------------------- -------------
<S> <C>
1999........................................................................... $ 2,191
2000........................................................................... 1,137
2001........................................................................... 519
2002........................................................................... 208
2003........................................................................... 216
Thereafter..................................................................... 85,253
-------------
$ 89,524
-------------
-------------
</TABLE>
On October 16, 1997, the Company issued $85,000 of Series B 9-3/4% Senior
Notes ("Senior Notes"), due October 2004. The net proceeds from the Senior Notes
totaled approximately $81,700 of which $41,500 was used to repay the term loan,
the line of credit and the subordinated note payable. The transaction fees of
approximately $3,300, were accounted for as deferred financing costs. The Senior
Notes bear interest at an annual rate of 9-3/4%, payable semi-annually. The
notes are redeemable at the option of the Company on or after October 15, 2001.
The Senior Notes are non-collateralized and rank "PARI PASSU" with all
unsubordinated debt and senior in right of payment with all subordinated
indebtedness of the Company. The note indenture under which the Senior Notes
were issued contains certain covenants that, among other things, limit the
Company's ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, engage in transactions with affiliates, incur
liens and engage in asset sales.
The Company has a line of credit with its principal bank for direct
borrowings and letters of credit of up to $25,000. The line of credit carries
interest at the Company's option based upon the Eurodollar borrowing rate plus
2.50% or the bank's prime rate plus 1.50%, as defined and the Company is
required to pay a commitment commission of 0.375% per annum based upon the daily
unutilized amount. There
F-12
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
were no outstanding borrowings against this line of credit as of December 31,
1998; however the amount available for borrowing has been reduced by outstanding
letters of credit totaling $2,007 (see Note 8). This line of credit expires on
October 15, 2002. The line of credit, as amended, contains various covenants
including interest coverage and a leverage ratio as well as restrictions on the
payment of dividends. The line of credit is collateralized by a mortgage on
land, building and equipment, which, as of December 31, 1998, had an aggregate
book value of approximately $3,447, and by all other assets of the Company.
The Term Loan, prior to repayment, carried interest based upon Eurodollar
borrowing rate plus 3.25%, or the base prime rate plus 2.00% as determined by
the Company.
The Subordinated note, prior to repayment, carried interest of 11.5%.
Notes payable were incurred upon the acquisition of various fitness clubs
and are subject to the Company's right of offset for possible post acquisition
adjustments arising out of operations of the acquired clubs. These notes are
stated at a discount from face value at rates of between 5% and 7%, and are
non-collateralized.
The carrying value of long-term debt, other than the Senior Notes,
approximates fair market value as of May 31, 1997, 1998 and December 31, 1998 as
the debt is generally short term in nature. The Senior Notes have a fair value
of approximately $82,000 as of December 31, 1998, based on the quoted market
price.
The Company's interest expense and capitalized interest related to club
facilities under construction for the years ended May 31, 1996, 1997, 1998 and
the seven months ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- --------------
1996 1997 1998 1998
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Interest costs expensed............................................ $ 1,012 $ 2,570 $ 7,130 $ 5,551
Interest costs capitalized......................................... 46 28 526 308
--------- --------- --------- -------
$ 1,058 $ 2,598 $ 7,656 $ 5,859
--------- --------- --------- -------
--------- --------- --------- -------
</TABLE>
The Company leases equipment under noncancelable capital leases. The initial
lease terms range from three to five years, after which the Company is required
to purchase the equipment at amounts defined by the agreements.
F-13
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
6. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS: (CONTINUED)
As of December 31, 1998, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING DECEMBER 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------ -----------------
<S> <C>
1999.......................................................................... $ 629
2000.......................................................................... 191
2001.......................................................................... 50
2002.......................................................................... 4
-----
874
Less, Amounts representing interest......................................... 89
-----
Present value of minimum capital lease payments........................... $ 785
-----
-----
</TABLE>
The cost of leased equipment included in club equipment was approximately
$4,190, $5,033 and $5,033 at May 31, 1997, 1998 and December 31, 1998,
respectively; related accumulated depreciation was $1,283, $2,234 and $3,222,
respectively.
7. RELATED PARTY TRANSACTIONS:
a. The Company entered into a management agreement with Town Squash AG
("TSAG"). The Company, together with the shareholders of TSAG, is
contingently liable to fund shortfalls in operating cash flow of TSAG, as
defined. The terms of the agreement provide for the Company to fund a
maximum amount of operating cash flow of approximately $142 ("Advances").
As of May 31, 1997, 1998 and December 31, 1998, the Company had no
outstanding Advances to TSAG.
Management fees earned during the years ended May 31, 1996, 1997, 1998
and the seven months ended December 31, 1998 amounted to approximately
$695, $223, $239 and $224, respectively.
b. The Company entered into a professional service agreement with
Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS"), for strategic and
financial advisory services on December 10, 1996. Fees for such services
are $250 per annum, and are payable while BRS owns 20% or more of the
outstanding Common stock of the Company. Amounts due BRS on May 31, 1997
and 1998, which are included in accounts payable, were $104. No amounts
were due BRS at December 31, 1998.
8. LEASES:
The Company leases office, warehouse and multi-recreational facilities and
certain equipment under noncancelable operating leases. In addition to base
rent, the facility leases generally provide for additional rent based on
increases in real estate taxes and other costs. Certain leases give the Company
the right to acquire the leased facility at defined prices based on fair value
and provide for additional rent based upon defined formulas of revenue, cash
flow or operating results of the respective facilities. Under
F-14
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
8. LEASES: (CONTINUED)
the provisions of certain of these leases, the Company is required to maintain
irrevocable letters of credit, which total $2,007.
The leases expire at various times through December 31, 2021, and certain
leases may be extended at the Company's option.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, MINIMUM ANNUAL RENTAL
- -------------------------------------------------------------------- ------------------------
<S> <C>
1999................................................................ $ 20,616
2000................................................................ 22,095
2001................................................................ 22,259
2002................................................................ 22,019
2003................................................................ 21,789
Aggregate thereafter................................................ 176,925
----------
$ 285,703
----------
----------
</TABLE>
Rent expense, including the effect of deferred lease liabilities, for the
years ended May 31, 1996, 1997, 1998 and the seven months ended December 31,
1998 was approximately $8,653, $10,169, $15,493 and $13,914, respectively. Such
amounts include additional rent of $1,863, $2,146, $2,590 and $2,087,
respectively.
The Company, as landlord, leases space under noncancelable operating leases.
In addition to base rent, certain leases provide for additional rent based on
increases in real estate taxes, indexation, utilities and defined amounts based
on the operating results of the lessee. The leases expire at various times
through December 31, 2013. Future minimum rentals receivable under noncancelable
leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, MINIMUM ANNUAL RENTAL
- -------------------------------------------------------------------- -------------------------
<S> <C>
1999................................................................ $ 828
2000................................................................ 825
2001................................................................ 829
2002................................................................ 761
2003................................................................ 599
Aggregate thereafter................................................ 1,033
-------
$ 4,875
-------
-------
</TABLE>
Rental income, including noncash rental income, for the years ended May 31,
1996, 1997, 1998 and the seven months ended December 31, 1998, was approximately
$882, $936, $963 and $822, respectively. Such amounts included additional rental
charges above the base rent of $570, $620, $651 and $608, respectively.
F-15
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK:
a. CAPITALIZATION:
The Company's certificate of incorporation, as amended during November
1998, provides for the issuance of up to 3,500,000 shares of capital
stock, consisting of 2,500,000 shares of Class A Voting Common Stock
("Class A"), par value $0.001 per share; 500,000 shares of Class B Non-
voting Common Stock ("Class B"), par value of $0.001 per share, (Class A
and Class B are collectively referred to herein as "Common Stock");
100,000 shares of Redeemable Senior Preferred Stock ("Senior"), par value
$1.00 per share; 200,000 shares of Series A Preferred Stock, ("Series A")
par value $1.00 per share, and 200,000 shares of Series B Preferred Stock
("Series B") par value $1.00 per share.
All stockholders have preemptive rights to purchase a pro-rata share of
any future sales of securities, as defined.
REDEEMABLE SENIOR PREFERRED STOCK
During November 1998, the Company issued 40,000 shares of mandatorily
redeemable Senior stock and 143,261 warrants. The Senior stock has no
voting rights except as required by law. The warrants have an exercise
price of $0.01, expire in November 2008 and are exercisable into an equal
number of shares of Class A Common Stock. After payment of fees and
expenses of approximately $365 the Company received net proceeds of
$39,635. Upon issuance, a $3,416 value was ascribed to the warrants. The
initial fair value of the Senior stock ($36,219) is being accreted to
it's liquidation value using the interest method. The accreted amount for
the seven months ended December 31, 1998 was $28. The Senior stock is
redeemable in November 2008. In the event that certain defined events
occur, the number of warrants exercisable will be reduced.
The Senior stock has liquidation preferences over Series A, Series B and
Common stock. The Senior stock may, at the option of the holder, be
converted into Common stock upon the initial public offering ("IPO") of
the Company's common stock at a conversion rate equal to the IPO price.
The Senior stock has a liquidation value of $1,000 per share plus
cumulative unpaid dividends of $488 as of December 31, 1998. The Senior
stockholders are entitled to a cumulative 12% annual dividend, based upon
the per share price of $1,000.
F-16
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
A summary of transactions related to the Senior stock for the seventh
month period ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Proceeds received in connection with the issuance of Senior stock
and warrants.................................................... $ 40,000
Expenses incurred in connection with issuance..................... (365)
Fair value ascribed to warrants at issuance....................... (3,416)
---------
Fair value of Senior stock at date of issuance.................... 36,219
Accretion to Senior stock liquidation value....................... 28
Accretion of Senior stock dividends............................... 488
---------
December 31, 1998 Senior stock carrying value..................... $ 36,735
---------
---------
</TABLE>
Cumulative unpaid dividends on Senior stock are payable upon certain
defined events which include: the dissolution, liquidation or winding up
of the Company; the redemption of such shares; or the sale of
substantially all of the assets of the Company.
PREFERRED STOCK
The Preferred Stock has liquidation preferences over Common Stock. The
Company's Series A and Series B stock have no conversion features or
voting rights except as required by law, and rank "PARI PASSU."
Series A stock has a liquidation value of $100 per share plus cumulative
unpaid dividends of $4,987 as of December 31, 1998. Series A stockholders
are entitled to a cumulative 14% annual dividend based upon the per share
price of $100.
Series B stock has a liquidation value of $35 per share plus cumulative
unpaid dividends of $44 as of December 31, 1998. Series B stockholders
are entitled to a cumulative 14% annual dividend based upon the per share
price of $35.
Cumulative unpaid dividends on all Preferred Stock are payable upon
certain defined events which include: the dissolution; liquidation or
winding up of the Company; the redemption of such shares; or the sale of
substantially all of the assets of the Company.
COMMON STOCK
Class A stock and Class B stock each have identical terms with the
exception that Class A stock is entitled to one vote per share, while
Class B stock has no voting rights, except as required by law. In
addition, Class B stock is convertible into an equal number of Class A
shares, at the option of the holder of the majority of the Class B stock.
To date, the Company has not issued Class B stock.
F-17
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
b. STOCK OPTIONS and WARRANTS:
The following table summarizes the stock option activity for the years ended
May 31, 1996, 1997, 1998 and the seven months ended December 31, 1998:
<TABLE>
<CAPTION>
CLASS A CLASS A
COMMON COMMON CLASS B SERIES B
($0.01 ($.001 CONVERTIBLE REDEEMABLE SERIES B
STOCK OPTIONS PAR VALUE) PAR VALUE) COMMON PREFERRED PREFERRED
- ----------------------------------------------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at June 1, 1995.................. 150,000 121,000 21,251
Options exercised............................ (13,358) (2,351)
Options cancelled............................ (6,642) (349)
---------- ------------ ------------
Outstanding at May 31, 1996................ 130,000 118,300 21,251
Options granted.............................. 57,142 20,000 164,783
Options exercised............................ (130,000) (138,300) (21,251)
---------- ----------- ------------ ------------ -----------
Outstanding at May 31, 1997................ -- 57,142 -- -- 164,783
---------- ------------ ------------
---------- ------------ ------------
Options granted................................ 14,700
----------- -----------
Outstanding at May 31, 1998 and December
31, 1998................................. 71,842 164,783
----------- -----------
----------- -----------
Exercise price:
Outstanding at June 1, 1995.................. $ 3.40 $ 10.00 $ 3.00
Options exercised............................ 2.40 9.89
Options cancelled............................ 2.40 9.89
---------- ------------ ------------
Weighted average price of outstanding options
at May 31, 1996.............................. 3.55 10.06 3.00
Options granted.............................. $ 1.00(i) 6.00 (ii $ 10.00(ii)
Options exercised............................ 3.55 9.47 3.00
---------- ----------- ------------ ------------ -----------
Weighted average price of outstanding options
at May 31, 1997.............................. -- 1.00 -- -- 10.00
---------- ------------ ------------
---------- ------------ ------------
Options granted.............................. 17.50 (ii
----------- -----------
Weighted average price of outstanding options
at May 31, 1998 and December 31, 1998........ 4.38 10.00
----------- -----------
----------- -----------
</TABLE>
- ------------------------
(i) Option exercise price equal to market price on the grant date based upon
independent appraisal.
(ii) Option exercise price less than market price on the grant date based upon
independent appraisal.
As of May 31, 1996, all outstanding options were exercisable. As of May 31,
1997 and 1998, all outstanding options for Series B Redeemable Preferred Stock
were exercisable and 11,428 and 25,797 options of Class A stock respectively
were exercisable.
F-18
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
The following table summarizes stock option information as of December 31,
1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------ -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Class A Common:
1997 Grants................................ 57,142 99 months $ 1.00 22,857 $ 1.00
1998 Grants................................ 14,700 99 months $ 17.50 2,940 $ 17.50
Series B Preferred........................... 164,783 275 months $ 10.00 164,783 $ 10.00
</TABLE>
CLASS A COMMON STOCK ($.001 PAR VALUE) OPTIONS:
During the year ended May 31, 1997 the Company adopted the Town Sports
International Inc. 1997 Common Stock Option Plan (the "1997 Plan"). The
provisions of the 1997 Plan, as amended and restated, provide for the Company's
Board of Directors to grant to executives and key employees options to acquire
80,876 shares of Class A stock.
The Company granted 57,142 options ("1997 Grants") with an exercise price of
$1.00 on December 10, 1996. The 1997 Grants have a term of 10 years and
originally vested based on the achievement of annual equity values as defined.
During the year ended May 31, 1998, the 1997 Grants were amended. The amendment
impacted 45,714 options, which had not previously vested (the "Amended Grants")
by adding a provision whereby unvested outstanding options would automatically
vest on December 10, 2005. Vesting will be accelerated in the event that certain
defined events occur including the achievement of certain equity values, the
sale of the Company, or an initial public offering of equity securities as
defined.
During the year ended May 31, 1998, the Company granted 14,700 options
("1998 Grants") with an exercise price of $17.50 and a term of 10 years. This
exercise price was below the estimated fair value of the Class A stock of $60.50
on the date of grant. The 1998 Grants vest in full on December 10, 2005;
however, vesting will be accelerated in the event that certain defined events
occur including the achievement of annual equity values or the sale of the
Company.
In accordance with APB No. 25, the Company recorded unearned compensation in
connection with the Amended Grants and the 1998 Grants. Such amount is included
within stockholders' deficit and represented the difference between the
estimated fair value of the Class A stock on the date of amendment or grant,
respectively, and the exercise price. Unearned compensation will be amortized as
compensation expense over the vesting period. During the year ended May 31,
1998, amortization of unearned compensation totaled $806. For the seven months
ended December 31, 1998, no additional options vested and accordingly there was
no amortization of unearned compensation.
As of December 31, 1998, shares reserved for future option awards totaled
9,034.
F-19
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
SERIES B PREFERRED STOCK OPTIONS:
During the year ended May 31, 1997, the Company granted 164,783 options
("Series B Options") to certain employees which entitle the holders to purchase
an equal number of shares of Series B stock at an exercise price of $10.00 per
share. The estimated fair value of the Series B stock on the date of grant was
$35.00 per share. Accordingly, the Company recognized an aggregate charge for
the difference between the Series B Options' exercise price and the estimated
fair value of the Series B stock, which totaled $4,120. Series B Options were
fully vested on the date of grant and expire on December 31, 2021. The terms of
the Series B Options also contain provisions whereby the exercise price will be
reduced or in certain cases, the option holder will receive cash in accordance
with a formula as defined. The aggregate value of either a reduction in exercise
price or the distribution of cash will be deemed compensatory and accordingly
the Company will record compensation expense. For the years ended May 31, 1997
and 1998 and the seven months ended December 31, 1998, compensation expense
recognized in connection with Series B Options totaled $273, $636 and $434,
respectively. There are no shares of Series B Preferred Stock reserved for
future option grants.
CLASS A ($0.01 PAR VALUE) AND CLASS B CONVERTIBLE OPTIONS:
During the years ended May 31, 1996 and 1997, in connection with the
granting of Class A Common Stock ($0.001 par value) and Class B Convertible
Common Stock Options, the Company recognized a compensation charge of
approximately $1,967 and $5,933, respectively. Such charges represented the
difference between the exercise price of the respective options and the fair
market value of the underlying stock as determined by the Board of Directors.
PRO FORMA OPERATING RESULTS:
The following table summarizes the pro forma operating results of the
Company had compensation costs for the outstanding options been determined in
accordance with the fair value based method of accounting for stock-based
compensation. There were no options granted during the year ended May 31, 1996
and the seven months ended December 31, 1998.
Since option grants vest over several years and additional grants are
expected in the future, the pro forma results noted below are not likely to be
representative of the effects on future years of the application of the fair
value based method. No additional options vested during the seven months ended
December 31, 1998, therefore the effects of the fair value based method on
operating results for that period was immaterial.
<TABLE>
<CAPTION>
MAY 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Pro forma amounts:
Net loss to common stockholder........................................ $ (1,826) $ (1,804)
--------- ---------
--------- ---------
</TABLE>
For the purposes of the above pro forma information, the fair value of each
option granted was estimated on the date of grant using the Black-Scholes option
pricing model. For the years ending May 31, 1997 and 1998, the weighted-average
fair value of the option grants was approximately $26.00 and $44.00,
respectively. The following weighted-average assumptions were used in computing
the fair
F-20
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY AND REDEEMABLE SENIOR PREFERRED STOCK: (CONTINUED)
value of options grants: expected volatility of 60% for all periods; risk-free
interest rate of approximately 6.5% for May 31, 1997 and 5.5% for May 31, 1998;
expected lives of five years for May 31, 1997, and three to five years for May
31, 1998; and a zero dividend yield for all periods.
WARRANTS TO BUY COMMON STOCK:
In connection with the issuance of the Subordinated note payable on December
10, 1996, warrants to buy 124,022 Class A Common Shares were issued at an
exercise price of $0.01 per share. Original issue discount arising upon this
issue, totaled approximately $123. 10,000 warrants were exercised on December
10, 1996. The amount of warrants outstanding was reduced during the seven months
ended December 31, 1998 by 38,308 to 75,714 in connection with the issuance of
the Senior stock. As of December 31, 1998, the remaining outstanding warrants
are fully exercisable and expire in December 2006.
10. ASSET ACQUISITIONS:
During the years ended May 31, 1996, 1997, 1998 and the seven months ended
December 31, 1998, the Company completed the acquisition of 36 fitness clubs.
With the exception of the Ultrafit, Inc. and Affiliates ("Ovox") and Lifestyle
Fitness of Springfield, Inc. and Affiliates ("Lifestyle") acquisitions, as
discussed below, the individual acquisitions were not material to the financial
position or results of operations of the Company. The table below summarizes the
aggregate purchase price and the purchase price allocation to assets acquired:
<TABLE>
<CAPTION>
SEVEN MONTHS
ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- --------------
1996 1997 1998 1998
--------- --------- --------- --------------
<S> <C> <C> <C> <C>
Number of clubs acquired........................................... 1 3 16 16
--------- --------- --------- --------------
--------- --------- --------- --------------
Purchase prices payable in cash at closing......................... $ 35 $ 1,888 $ 19,733 $ 25,103
Issuance and assumption of notes payable........................... 269 2,250 4,110 4,654
--------- --------- --------- --------------
Total purchase prices.......................................... $ 304 $ 4,138 $ 23,843 $ 29,757
--------- --------- --------- --------------
--------- --------- --------- --------------
Allocation of purchase prices:
Fixed assets..................................................... $ 299 $ 2,462 $ 9,011 $ 9,177
Membership lists................................................. -- 177 2,978 2,559
Goodwill......................................................... -- 1,484 11,557 18,021
Other net assets acquired........................................ 5 15 297 --
--------- --------- --------- --------------
Total allocation of purchase prices............................ $ 304 $ 4,138 $ 23,843 $ 29,757
--------- --------- --------- --------------
--------- --------- --------- --------------
</TABLE>
For financial reporting purposes, these acquisitions have been accounted for
under the purchase method and, accordingly, the purchase prices have been
assigned to the assets and liabilities acquired on the basis of their respective
fair values on the date of acquisition. The excess of purchase prices over the
net tangible assets acquired has been allocated to membership lists acquired,
covenant-not-to compete and goodwill. Intangible assets are amortized by the
straight-line basis over the estimated life of the asset. Acquired membership
lists are amortized over a 2 year period and goodwill is amortized over
remaining
F-21
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
10. ASSET ACQUISITIONS: (CONTINUED)
lives of the leases of the acquired fitness club which range from 3.5 to 15
years. The results of operations of the clubs have been included in the
Company's consolidated financial statements from the respective dates of
acquisition and the impact of these acquisitions on the consolidated financial
statements of the Company was not material, with the exception of the following
acquisitions.
On April 6, 1998, the Company acquired Ovox. Ovox's operations consisted of
four fitness clubs in New Jersey which were owned and operated by a common group
of investors. The purchase price totaled $8,177, which included $7,750 of cash
and notes payable of $236. Transaction costs amounted to $191. The excess of the
purchase price over the net fair value of the assets acquired was $6,589, and
has been allocated to the membership lists acquired and goodwill. The following
unaudited pro forma information has been prepared assuming the Ovox acquisition
had taken place at the beginning of the respective periods. The pro forma
adjustments give effect to amortization of goodwill, interest expense on
acquisition debt, and related income tax effects:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
MAY 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues......................................................... $ 60,898 $ 87,158
Pro forma net income (loss) before extraordinary items and
cumulative effect of change in accounting policy............... (862) 1,275
Proforma net loss to common stockholders......................... $ (2,148) $ (1,982)
</TABLE>
On August 6, 1998 the Company acquired Lifestyle. Lifestyle's operations
consisted of six fitness clubs in New Jersey, which were owned and operated by a
common group of investors. The purchase price totaled $10,752, which included
$10,000 of cash and notes payable of $300. Transaction costs amounted to $452.
The following unaudited pro forma information has been prepared assuming the
Lifestyle Acquisition had taken place at the beginning of the respective periods
reported herein. The pro forma adjustments give effect to amortization of
goodwill, interest expense on acquisition debt, and the related income tax
effects:
<TABLE>
<CAPTION>
FOR THE SEVEN
FOR THE YEAR MONTHS ENDED
ENDED DECEMBER 31,
MAY 31, 1998 1998
------------ --------------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues............................................................................ $ 90,037 $ 72,989
Pro forma net income (loss) before extraordinary item cumulative effect of change in
accounting policy................................................................. 1,130 (575)
Pro forma net income (loss) to common stockholders.................................. $ 260 $ (2,240)
</TABLE>
This unaudited proforma financial information is presented for informational
purposes only and may not be indicative of the results of operations as they
would have been if the Company and the acquired clubs had been a single entity
for the respective periods presented, nor is it indicative of the results of
operations which may occur in the future. Anticipated efficiencies from the
consolidation of the
F-22
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
10. ASSET ACQUISITIONS: (CONTINUED)
acquired clubs and the Company have been excluded from the amounts included in
the proforma summary presented above.
11. REVENUE FROM CLUB OPERATIONS:
Revenues from club operations for the years ended May 31, 1996, 1997, 1998
and the seven months ended December 31, 1997 (unaudited) and 1998 are summarized
below:
<TABLE>
<CAPTION>
SEVEN MONTHS ENDED
YEAR ENDED MAY 31, DECEMBER 31,
------------------------------- -----------------------
1996 1997 1998 1997 1998
--------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Membership dues..................................... $ 35,800 $ 45,916 $ 66,878 $ 34,987 $ 59,105
Initiation Fees..................................... 1,849 3,308 4,408 2,423 3,374
Other club revenues................................. 3,147 4,940 8,433 4,080 7,485
--------- --------- --------- ------------ ---------
$ 40,796 $ 54,164 $ 79,719 $ 41,490 $ 69,964
--------- --------- --------- ------------ ---------
--------- --------- --------- ------------ ---------
</TABLE>
12. CORPORATE INCOME TAXES:
The (benefit) provision for income taxes for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998 consists of the
following:
<TABLE>
<CAPTION>
MAY 31, 1996
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current......................................................................... $ 1,256 $ 911 $ 2,167
Deferred........................................................................ (964) (575) (1,539)
--------- ----------- ---------
$ 292 $ 336 $ 628
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1997
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current......................................................................... $ 1,053 $ 762 $ 1,815
Deferred........................................................................ (1,226) (832) (2,058)
--------- ----------- ---------
$ (173) $ (70) $ (243)
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1998
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current......................................................................... $ 1,383 $ 935 $ 2,318
Deferred........................................................................ (751) (436) (1,187)
--------- ----------- ---------
--------- ----------- ---------
$ 632 $ 499 $ 1,131
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
F-23
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
12. CORPORATE INCOME TAXES: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
STATE
FEDERAL AND LOCAL TOTAL
--------- ----------- ---------
<S> <C> <C> <C>
Current......................................................................... $ 588 425 $ 1,012
Deferred........................................................................ (952) (460) (1,411)
--------- ----------- ---------
$ (364) $ (35) $ (399)
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
The components of the net deferred tax asset as of May 31, 1997, 1998 and
December 31, 1998 are summarized below:
<TABLE>
<CAPTION>
MAY 31, DECEMBER 31,
-------------------- --------------
1997 1998 1998
--------- --------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred lease liabilities................................................. $ 2,966 $ 4,106 $ 4,750
Compensation expense incurred in connection with stock options............. 1,846 2,445 2,611
Fixed assets and intangible assets......................................... 1,153 358 1,176
State net operating loss carry-forwards.................................... 100 214 286
Deferred revenue........................................................... 1,835 2,349 2,964
Other...................................................................... 33 56 162
--------- --------- -------
7,933 9,528 11,949
--------- --------- -------
Deferred tax liabilities:
Accrued expenses........................................................... (153) (150) (149)
Deferred costs............................................................. (1,624) (2,035) (2,946)
--------- --------- -------
(1,777) (2,185) (3,095)
--------- --------- -------
Net deferred tax asset, prior to valuation allowance..................... 6,156 7,343 8,854
Valuation allowance.......................................................... (184) (184) (284)
--------- --------- -------
Net deferred tax asset................................................... $ 5,972 $ 7,159 $ 8,570
--------- --------- -------
--------- --------- -------
</TABLE>
As of December 31, 1998, the Company has state net operating loss
carry-forwards of approximately $2,900. Such amounts expire between December 31,
1999 and December 31, 2005.
F-24
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
12. CORPORATE INCOME TAXES: (CONTINUED)
The following table accounts for the differences between the actual
provision and the amounts obtained by applying the statutory U.S. Federal income
tax rate of 34% to the income (loss) before provision (benefit) for corporate
income taxes:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate................................................. 34% (34)% 34%
State and local income taxes, net of federal tax benefit, Change of
valuation allowance and tax rates........................................ 19 (14) 15
Adjustment of prior year's tax refund...................................... -- 25 --
Non-taxable interest income................................................ -- -- --
Other...................................................................... -- 2 1
-- -- --
53% (21)% 50%
-- -- --
-- -- --
<CAPTION>
SEVEN MONTHS
ENDED
DECEMBER 31,
-----------------
1998
-----------------
<S> <C>
Federal statutory tax rate................................................. (34)%
State and local income taxes, net of federal tax benefit, Change of
valuation allowance and tax rates........................................ 1
Adjustment of prior year's tax refund...................................... --
Non-taxable interest income................................................ (11)
Other...................................................................... 2
--
(42)%
--
--
</TABLE>
13. CONTINGENCIES:
A claim had been filed against the Company related to alleged copyright
infringement from the unauthorized use of photographs in advertisements. The
case was brought originally in federal Court in June 1996 and was dismissed in
February 1998 because the plaintiffs had not registered copyrights to the
photographs. A further claim was filed in New York State Supreme Court in April
1998 and was dismissed in December 1998.
The Company is a party to various other lawsuits arising in the normal
course of business. Management believes that the ultimate outcome of these
matters will not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
14. EMPLOYEE BENEFIT PLAN:
The Company maintains a 401(k) defined contribution plan and is subject to
the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
The Plan provides for the Company to make discretionary contributions; however,
the Company elected not to make contributions for the years ended May 31, 1996,
1997, 1998 and the seven months ended December 31, 1998.
15. EXTRAORDINARY ITEM:
During the year ended May 31, 1998, the Company completed a $85,000
financing. As part of this financing, an existing term loan, a line of credit
and a subordinated note were repaid. Accordingly, previously capitalized fees
and expenses relating to obtaining such financing of $1,406 were written off,
net of taxes of $624.
16. SUBSEQUENT EVENT:
Subsequent to December 31, 1998, the Company acquired two fitness clubs.
These acquisitions will be accounted for in accordance with the purchase method.
The aggregate purchase price totaled $1,709 which included $1,000 payable at
closing and the issuance of notes payable totaling $709.
F-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
New York, New York
February 16, 1999
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
Our audits on the consolidated financial statements referred to in our
report dated February 16, 1999 appearing in this Form 10-K on page F-1 also
included in an audit of the financial statement schedule which appears on page
F-27 of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therin when
read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
F-26
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
For each of the years ended May 31, 1996, 1997, 1998 and the seven month
period ended December 31, 1998.
<TABLE>
<CAPTION>
COL. B COL. C COL. E
------------- ---------------------------- -------------
BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE AT
BEGINNING COSTS AND OTHER ------------- END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
- ----------------------------------------------- ------------- ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Deferred tax asset valuation allowance:........ $ 284 $ 284
1996...........................................
1997........................................... 284 $ (100)(1) 184
The year ended May 31, 1998.................... 184 184
The seven months ended December 31, 1998....... 184 $ 100(2) 284
</TABLE>
- ------------------------
(1) Reduction of valuation allowance from the utilization of state net operating
loss carryfowards which were no longer required.
(2) Increase in valuation allowance required for state net operating loss
carryforwards.
F-27
<PAGE>
Exhibit 3.3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
TOWN SPORTS INTERNATIONAL, INC.
(Under Section 805 of the Business Corporation Law)
The undersigned, for the purpose of amending the Certificate of
Incorporation pursuant to Section 805 of the Business Corporation Law of the
State of New York (the "Business Corporation Law"), hereby certifies:
FIRST: The name of the corporation is Town Sports International, Inc.
(the "Corporation"). The Corporation was originally incorporated under the name
St John Squash Racquets, Inc.
SECOND: The Certificate of Incorporation of the Corporation was filed
on June 5, 1973 by the Department of State.
THIRD: The Certificate of Incorporation is hereby amended to increase
the number of authorized shares of Class A Common Stock, $.001 par value per
share from 1,150,000 shares of Class A Common Stock, $.001 par value per share
to 2,500,000 shares of Class A Common Stock, $.001 par value per share.
FOURTH: The Certificate of Incorporation is hereby amended to create a
new series of stock to be designated as Senior Preferred Stock, $1.00 par value
per share of which 100,000 shares will be authorized for issuance.
FIFTH: In order to effectuate the foregoing amendment, Article IV of
the Certificate of Incorporation is hereby amended and restated in its entirety
to read as follows:
<PAGE>
ARTICLE IV
AUTHORIZED CAPITAL STOCK
AUTHORIZED SHARES
The total number of shares of capital stock which the
Corporation has authority to issue is 3,500,000 shares, consisting of:
(i) 2,500,000 shares of Class A Common Stock, par value $.001
per share (the "CLASS A COMMON");
(ii) 500,000 shares of Class B Common Stock, par value $.001
per share (the "CLASS B COMMON");
(iii) 100,000 shares of Senior Preferred Stock, par value
$1.00 per share (the "SENIOR PREFERRED STOCK");
(iv) 200,000 shares of Series A Preferred Stock, par value
$1.00 per share (the "SERIES A PREFERRED STOCK"); and
(v) 200,000 shares of Series B Preferred Stock, par value
$1.00 per share (the "SERIES B PREFERRED STOCK").
The Class A Common and the Class B Common are hereafter
collectively referred to as the "COMMON STOCK." The Series A Preferred Stock and
the Series B Preferred Stock are hereafter collectively referred to as the
"JUNIOR PREFERRED STOCK."
In addition to any other consent or approval which may be
required pursuant to this Certificate of Incorporation, no amendment or waiver
of any provision of this Section I shall be effective without the prior approval
of the holders of a majority of the then
2
<PAGE>
outstanding Common Stock voting as a single class. For purposes of votes on
amendments and waivers to this Section I, each share of Common Stock shall be
entitled to one vote.
1. SENIOR PREFERRED STOCK
Except as otherwise provided in this Section II or as
otherwise required by applicable law, all shares of Senior Preferred Stock (each
such share, a "SENIOR SHARE") shall be identical in all respects and shall
entitle the holders thereof to the same rights and privileges, subject to the
same qualifications, limitations and restrictions.
A. DIVIDENDS.
1. GENERAL OBLIGATION. When and as declared by the
Corporation=s board of directors (the "BOARD") and to the extent permitted under
the Business Corporation Law of New York, the Corporation will pay preferential
dividends to the holders of the Senior Preferred Stock as provided in this
Section 1. Except as otherwise provided herein, dividends on each share of
Senior Preferred Stock will accrue at a rate of 12% per annum of the Liquidation
Value of such Senior Share from and including the date of issuance of such share
to and including the date on which the Liquidation Value (plus all accumulated,
accrued and unpaid dividends thereon) of such Senior Share is paid in full. Such
dividends will accrue whether or not they have been declared and whether or not
there are profits, surplus or other funds of the Corporation legally available
for the payment of dividends. The date on which the Corporation initially issues
any Senior Share will be deemed to be its "date of issuance" regardless of the
number of times transfer of such Senior Share is made on the stock records
maintained by or for the Corporation and regardless of the number of
certificates which may be issued to evidence such Senior Share.
2. DIVIDEND REFERENCE DATES. To the extent that all accrued
dividends are not paid on each May 31 and November 30 of each year beginning May
31, 1999 (the "DIVIDEND REFERENCE DATES"), all dividends which have accrued on
each Senior Share outstanding during the six-month period (or other period in
the case of the initial Dividend Reference Date) ending upon each such Dividend
Reference Date will be accumulated and added to the Liquidation Value of such
Senior Shares.
3. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. If at any time
the Corporation elects to pay dividends in cash and pays less than the total
amount of dividends then accrued and unpaid with respect to the Senior Preferred
Stock, such payment will be
3
<PAGE>
distributed ratably among the holders of Senior Shares based upon the aggregate
accrued but unpaid dividends on the Senior Shares held by each such holder, and
any amounts of such dividends remaining thereafter shall, until paid to the
holder thereof, remain accumulated dividends with respect to such Senior Share
and shall remain part of the Liquidation Value thereof.
4. PAYMENT OF STOCK DIVIDENDS. In the sole discretion of the
Corporation, any dividends accruing on the Senior Shares may be paid, in lieu of
cash dividends, by the issuance of additional Senior Shares (including
fractional Senior Shares) having an aggregate Liquidation Value at the time of
such payment equal to the amount of the dividend to be paid; PROVIDED, that if
the Corporation pays less than the total amount of dividends then accrued on the
Senior Preferred Stock in the form of additional Senior Shares, such payment in
Senior Shares shall be made PRO RATA to the holders of Senior Shares based upon
the aggregate accrued but unpaid dividends on the Senior Shares held by each
such holder.
B. LIQUIDATION. Upon any liquidation, dissolution or winding up of the
Corporation, before any distribution or payment is made upon any Junior
Securities, the holders of Senior Shares shall be entitled to be paid an amount
in cash equal to the aggregate Liquidation Value (plus all accumulated, accrued
and unpaid dividends thereon) of all such Senior Shares outstanding, and the
holders of Senior Shares as such will not be entitled to any further payment. If
upon any such liquidation, dissolution or winding up of the Corporation, the
Corporation=s assets to be distributed among the holders of the Senior Preferred
Stock are insufficient to permit payment to such holders of the aggregate amount
which they are entitled to be paid, then the entire assets to be distributed to
the holders of Senior Preferred Stock shall be distributed ratably among such
holders based upon the aggregate Liquidation Value (plus all accumulated,
accrued and unpaid dividends) of the Senior Shares held by each such holder.
Prior to the time of any liquidation, dissolution or winding up of the
Corporation, the Corporation shall declare for payment all accrued and unpaid
dividends with respect to the Senior Preferred Stock. The Corporation will mail
written notice of such liquidation, dissolution or winding up, not less than 10
days prior to the payment date stated therein, to each record holder of Senior
Preferred Stock. Neither the consolidation or merger of the Corporation into or
with any other corporation or corporations, nor the reduction of the capital
stock of the Corporation, will be deemed to be a liquidation, dissolution or
winding up of the Corporation within the meaning of this Section 2.
C. REDEMPTIONS.
1. SCHEDULED REDEMPTION. On the earlier of (x) November 13,
2008 or (y) six months after the later to occur of (i) the consummation of a
Conversion Event and (ii) the date on which the Corporation has fully repaid and
fulfilled its obligations under
4
<PAGE>
the terms and conditions of that certain indenture dated as of October 16, 1997,
by and between the Corporation and the United States Trust Company of New York
(the "SCHEDULED REDEMPTION DATE"), the Corporation will redeem all issued and
outstanding Senior Shares, at a price per Senior Share equal to the Liquidation
Value thereof (plus all accumulated, accrued and unpaid dividends thereon).
2. OPTIONAL REDEMPTIONS. The Corporation may at any time
redeem all or any portion of the Senior Preferred Stock then outstanding at a
price per Senior Share equal to the Liquidation Value thereof (plus all
accumulated, accrued and unpaid dividends thereon); PROVIDED, that all partial
optional redemptions of Senior Preferred Stock pursuant to this subparagraph 3B
shall be made PRO RATA among the holders of such Senior Preferred Stock on the
basis of the number of Senior Shares held by each such holder in the order and
priority specified in Section 3C. Redemptions made pursuant to this Section 3B
will not relieve the Corporation of its obligations to redeem outstanding Senior
Shares on the Scheduled Redemption Date.
3. REDEMPTION PRICE. For each Senior Share which is to be
redeemed, the Corporation will be obligated on the Redemption Date to pay to the
holder thereof (upon surrender by such holder at the Corporation=s principal
office of the certificate representing such Senior Share) an amount in
immediately available funds equal to the Liquidation Value thereof (plus all
accumulated, accrued and unpaid dividends thereon). If the Corporation=s funds
which are legally available for redemption of Senior Shares on any Redemption
Date are insufficient to redeem the total number of Senior Shares to be redeemed
on such date, those funds which are legally available will be used to redeem the
maximum possible number of Senior Shares to be redeemed (if any) ratably among
the holders of the Senior Shares to be redeemed based upon the aggregate
Liquidation Value of such Senior Shares (plus all accumulated, accrued and
unpaid dividends thereon) held by each such holder and other Senior Shares not
so redeemed shall remain issued and outstanding until redeemed in accordance
with the terms thereof. At any time thereafter when additional funds of the
Corporation are legally available for the redemption of Senior Shares, such
funds will immediately be used to redeem the balance of the Senior Shares which
the Corporation has become obligated to redeem on any Redemption Date but which
it has not redeemed in the order and priority set forth above.
4. NOTICE OF REDEMPTION. The Corporation will mail written
notice of each redemption of Senior Preferred Stock to each record holder of
Senior Shares to be redeemed not more than 30 nor less than 10 days prior to the
date on which such redemption is to be made. Upon mailing any notice of
redemption which relates to a redemption at the Corporation=s option, the
Corporation will become obligated to redeem the total number of Senior Shares
specified in such notice at the time of redemption specified therein. In case
fewer than the total number of Senior Shares represented by any certificate are
redeemed, a new
5
<PAGE>
certificate representing the number of unredeemed Senior Shares will be issued
to the holder thereof without cost to such holder within three business days
after surrender of the certificate representing the redeemed Senior Shares.
5. DETERMINATION OF THE NUMBER OF EACH HOLDER=S SENIOR SHARES
TO BE REDEEMED. Except as otherwise provided herein, the number of Senior Shares
to be redeemed from each holder thereof in redemptions hereunder will be the
number of Senior Shares determined by multiplying the total number of Senior
Shares to be redeemed times a fraction, the numerator of which will be the total
number of Senior Shares then held by such holder and the denominator of which
will be the total number of Senior Shares then outstanding.
6. DIVIDENDS AFTER REDEMPTION DATE. No Senior Share is
entitled to any dividends accruing after the date on which the Liquidation Value
(plus all accumulated, accrued and unpaid dividends thereon) of such Senior
Share is paid in full in immediately available funds. On such date all rights of
the holder of such Senior Share will cease, and such Senior Share will not be
deemed to be outstanding.
7. REDEEMED OR OTHERWISE ACQUIRED SENIOR SHARES. Any Senior
Shares which are redeemed or otherwise acquired by the Corporation will be
canceled and will not be reissued, sold or transferred.
8. OTHER REDEMPTIONS OR ACQUISITIONS. Neither the Corporation
nor any Subsidiary will redeem or otherwise acquire any Senior Preferred Stock,
except as expressly authorized herein or pursuant to a purchase offer made pro
rata to all holders of the Senior Preferred Stock on the basis of the number of
Shares of Senior Preferred Stock owned by each such holder.
9. PRIORITY OF SENIOR PREFERRED STOCK. So long as any Senior
Preferred Stock remains outstanding, without the approval of the holders of a
majority of the Senior Shares then outstanding, neither the Corporation nor any
Subsidiary shall (i) declare or pay any dividends on any Junior Securities
(other than dividends declared in connection with any stock splits, stock
dividends, share combinations, share exchanges, or other recapitalizations in
which such dividends are made in the form of Junior Securities), or (ii)
repurchase or otherwise redeem any Junior Securities; PROVIDED, that the
Corporation may purchase shares of Common Stock from employees of the
Corporation and its Subsidiaries upon termination of employment.
6
<PAGE>
D. CONVERSION OF SENIOR PREFERRED STOCK.
1. OPTIONAL CONVERSION. Subject to Section 4B below, upon the
consummation of an Initial Public Offering (the "CONVERSION EVENT"), each Senior
Share shall, at the option of the holder of such Senior Share, be converted (and
the rights of the holder of the Senior Shares shall cease) into a number of
shares of the Corporation=s Class A Common equal to the (i) Liquidation Value of
such Senior Share as of the date of such Conversion Event (plus all accumulated,
accrued and unpaid dividends thereon) divided by (ii) the price at which each
share of Class A Common was sold in such Initial Public Offering. The
Corporation shall give prompt written notice to each holder of Senior Shares if
a Conversion Event has occurred, which notice shall describe in reasonable
detail the Conversion Event that has occurred.
2. SURRENDER OF CERTIFICATES. Each conversion of Senior Shares
into shares of Class A Common shall be effected by the surrender of the
certificate or certificates representing the Senior Shares to be converted at
the principal office of the Corporation at any time during normal business
hours, together with a written notice by the holder of such Senior Shares
stating that such holder desires to convert the Senior Shares, or a stated
number of the Senior Shares, represented by such certificate or certificates
into shares of Class A Common. Each conversion of Senior Shares shall be deemed
to have been effected as of the close of business on the date on which such
certificate or certificates have been surrendered and such notice has been
tendered, and at such time the rights of the holder of the converted Senior
Shares as such holder shall cease, and the person or persons in whose name or
names the certificate or certificates for shares of Class A Common are to be
issued upon such conversion shall be deemed to have become the holder or holders
of record of the shares of Class A Common represented thereby.
3. ISSUANCE OF CERTIFICATES. Within five Business Days after
the surrender of certificates of Senior Shares, the Corporation shall issue and
deliver in accordance with the surrendering holder=s instructions the
certificate or certificates for the Class A Common issuable upon such
conversion.
4. NO CHARGE. The issuance of certificates for Class A Common
upon conversion of the Senior Shares will be made without charge to the holders
of such Senior Shares of any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the related
issuance of Class A Common.
5. RESERVED SHARES. Upon the Conversion Event, the Corporation
shall take all such actions as may be necessary to assure that all shares of
Class A Common issuable pursuant to this Section 4 may be so issued without
violation of any applicable
7
<PAGE>
law or governmental regulation or any requirements of any domestic securities
exchange upon which shares of Common Stock may be listed (except for official
notice of issuance which will be immediately transmitted by the Corporation upon
issuance), including, but not limited to, amending the Corporation=s Articles of
Incorporation to increase the number of authorized but unissued shares of Class
A Common. All shares of Class A Common which are issuable pursuant to the terms
and conditions of this Section 4 shall, when issued, be duly and validly issued,
fully paid, and nonassessable and free from all taxes, liens and charges.
6. CLOSING BOOKS. The Corporation shall not close its books
against the transfer of Senior Shares in any manner which would interfere with
the timely conversion of any Senior Shares.
E. VOTING RIGHTS. Except as otherwise provided herein and as otherwise
required by law, the Senior Preferred Stock shall have no voting rights;
PROVIDED, that each holder of Senior Preferred Stock shall be entitled to notice
of all stockholders meetings at the same time and in the same manner as notice
is given to the stockholders entitled to vote at such meeting. With respect to
any issue required to be voted on and approved by holders of Senior Preferred
Stock, the holders of Senior Preferred Stock will vote as a single class.
F. COVENANTS. Notwithstanding anything to the contrary contained in
this Article IV, the Corporation shall not take any of the following actions
without the prior written consent received in accordance with Section 10 hereof:
(i) creating or issuing any class or series of equity security of the
Corporation that is senior or PARI PASSU in priority to the Senior Preferred
Stock; PROVIDED, that the Corporation may issue additional shares of Senior
Preferred Stock with an aggregate initial Liquidation Value of up to $25.0
million (the "ADDITIONAL SENIOR PREFERRED ISSUANCE"); (ii) redeeming or
repurchasing any Junior Security; PROVIDED, that the foregoing clause (ii) shall
not apply to redemptions or repurchases of any Junior Security from any employee
of the Corporation upon the death, disability, retirement or other termination
of such employee; (iii) increasing the number of authorized shares of Senior
Preferred Stock; PROVIDED, that the foregoing clause (iii) shall not apply to
the Additional Senior Preferred Issuance; (iv) declaring or paying any dividends
on any Junior Securities (other than dividends declared in connection with any
stock splits, stock dividends, share combinations, share exchanges, or other
recapitalizations in which such dividends are made in the form of Junior
Securities); and (v) entering into any transaction or series of transactions
after the date hereof, whether or not in the ordinary course of business with
any Affiliate or 5% Owner (or any Affiliate of such 5% Owner); PROVIDED, that
the foregoing clause (v) shall not apply to (A) employment arrangements with any
Executive or employees of the Corporation entered into in the ordinary course of
business, (B) any transactions expressly permitted or contemplated by the
Transaction Agreements, or (C) any transaction consented to by not less than 70%
of the
8
<PAGE>
Shareholder Shares (as such term is defined in the Shareholders Agreement),
excluding for purposes of this clause (C) Shareholder Shares held by such
Affiliate or 5% Owner.
G. REGISTRATION OF TRANSFER. The Corporation will keep at its principal
office a register for the registration of Senior Preferred Stock. Upon the
surrender of any certificate representing Senior Preferred Stock at such place,
the Corporation will, at the request of the record holder of such certificate,
execute and deliver (at the Corporation=s expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Senior Shares represented by the surrendered certificate. Each such new
certificate will be registered in such name and will represent such number of
Senior Shares as is requested by the holder of the surrendered certificate and
will be substantially identical in form to the surrendered certificate, and
dividends will accrue on the Senior Preferred Stock represented by such new
certificate from the date to which dividends have been fully paid on such Senior
Preferred Stock represented by the surrendered certificate.
H. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Senior Shares, and in the case of any such loss, theft or
destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is an institutional investor its own
agreement will be satisfactory), or, in the case of any such mutilation upon
surrender of such certificate, the Corporation will (at its expense) execute and
deliver in lieu of such certificate a new certificate of like kind representing
the number of Senior Shares of such class represented by such lost, stolen,
destroyed or mutilated certificate and dated the date of such lost, stolen,
destroyed or mutilated certificate, and dividends will accrue on the Senior
Preferred Stock represented by such new certificate from the date to which
dividends have been fully paid on such lost, stolen, destroyed or mutilated
certificate.
I. DEFINITIONS. The following definitions apply only to this
Section II.
"AFFILIATE" shall mean, 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" (including,
with 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).
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"AMENDED REGISTRATION RIGHTS AGREEMENT" means the Registration
Rights Agreement, dated as of December 10, 1996, by and among the Corporation
and its shareholders, as amended by the First Amendment to Registration Rights
Agreement, dated as of November 13, 1998, by and among the Corporation and
certain shareholders of the Corporation, as the same may be amended, restated,
or modified from time to time.
"BUSINESS DAY" means any day, excluding Saturday, Sunday, and
any day which shall be in the City of New York a legal holiday or a day on which
banking institutions are authorized by law or other governmental actions to
close.
"CONVERSION EVENT" has the meaning set forth in Section 4A.
"5% OWNER" means any Person who owns in excess of 5% of the
Common Stock on a fully diluted basis.
"INITIAL PUBLIC OFFERING" means the underwritten initial
public offering of Common Stock registered under the Securities Act.
"JUNIOR SECURITIES" means any of the Corporation=s equity
securities, other than the Senior Preferred Stock, including, without
limitation, the Junior Preferred Stock and the Common Stock.
"LIQUIDATION VALUE" of any Senior Share as of any particular
date will be equal to the sum of $1,000.00 per Senior Share, plus any and all
accumulated and unpaid dividends which are added to the Liquidation Value
pursuant to Section 1B above.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.
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"REDEMPTION DATE" as to any Senior Share means (x) November
13, 2008 or (y) the date specified in the notice of any redemption at the
Corporation=s option or the applicable date specified herein in the case of any
other redemption; PROVIDED, that no such date will be a Redemption Date unless
the applicable Liquidation Value (plus all accumulated, accrued and unpaid
dividends thereon) is actually paid, and if not so paid, the Redemption Date
will be the date on which such Liquidation Value (plus all accumulated, accrued
and unpaid dividends thereon) is fully paid.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHAREHOLDERS AGREEMENT" means the Amended and Restated
Shareholders Agreement, dated as of November 13, 1998, by and among the
Corporation and certain shareholders of the Corporation, as the same may be
amended, restated, or modified from time to time.
"SUBSIDIARY" means, with respect to any Person, any
corporation, partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of Senior Shares of stock
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a partnership,
association or other business entity, a majority of the partnership or other
similar ownership interest thereof is at the time owned or controlled, directly
or indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed to
have a majority ownership interest in a partnership, association or other
business entity if such Person or Persons shall be allocated a majority of
partnership, association or other business entity gains or losses or shall be or
control the managing director or a general partner of such partnership,
association or other business entity.
"TRANSACTION AGREEMENTS" means (i) the Shareholders Agreement,
(ii) the Amended Registration Rights Agreement, (iii) the Senior Preferred Stock
Purchase Agreement (as defined in the Shareholders Agreement), (iv) the Investor
Agreements (as defined in the Shareholders Agreement), (v) the Warrant Documents
(as defined in the Shareholders Agreement), (vi) the Second Senior Preferred
Stock Purchase Agreement (as defined in the Shareholder Agreement) (when and if
executed and delivered by the parties thereto), (vii) the Executive Agreements
(as defined in the Shareholders Agreement), (viii) the Common Option Agreements
(as defined in the Shareholders Agreement), (ix) the Preferred Option Agreements
(as defined in the Shareholders Agreement), and (x) the Professional Services
Agreement, dated as of December 10, 1996, by and among the Corporation and an
Affiliate of Bruckmann, Rosser, Sherrill & Co., L.P.
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J. AMENDMENT AND WAIVER
No amendment, modification or waiver will be binding or
effective with respect to any provision of this Section II without the prior
written consent of the holders of Senior Preferred Stock with a Liquidation
Value representing more than fifty percent (50%) of the aggregate Liquidation
Value of such Senior Preferred Stock then outstanding. Notwithstanding anything
to the contrary contained herein, no amendment, modification or waiver of any
provision of this Section II that adversely affects any holder of Senior
Preferred Stock and is prejudicial to such holder relative to all other holders
of Senior Preferred Stock shall be effective against such holder without such
holder=s consent.
K. NOTICES
Except as otherwise expressly provided, all notices referred
to herein will be in writing and will be delivered by registered or certified
mail, return receipt requested, postage prepaid and will be deemed to have been
given when so mailed (i) to the Corporation, at its principal executive offices
and (ii) to any stockholder, at such holder=s address as it appears in the stock
records of the Corporation (unless otherwise indicated by any such holder).
JUNIOR PREFERRED STOCK
Except as otherwise provided in this Section III or as
otherwise required by applicable law, all shares of Junior Preferred Stock shall
be identical in all respects and shall entitle the holders thereof to the same
rights and privileges, subject to the same qualifications, limitations and
restrictions.
A. DIVIDENDS.
1. GENERAL OBLIGATION. When and as declared by the
Corporation=s board of directors and to the extent permitted under the Business
Corporation Law of New York, the Corporation will pay preferential dividends to
the holders of the Junior
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Preferred Stock as provided in this Section 1. Except as otherwise provided
herein, dividends on each share of Series A Preferred Stock will accrue at a
rate of 14% per annum and dividends on each share of Series B Preferred Stock
will accrue at a rate of 14% per annum (each share of Series A Preferred Stock
and Series B Preferred Stock being a "Share") of the Liquidation Value of such
Share from and including the date of issuance of such Share to and including the
date on which the Liquidation Value (plus all accrued and unpaid dividends
thereon) of such Share is paid in full. Such dividends will accrue whether or
not they have been declared and whether or not there are profits, surplus or
other funds of the Corporation legally available for the payment of dividends.
The date on which the Corporation initially issues any Share will be deemed to
be its "date of issuance" regardless of the number of times transfer of such
Share is made on the stock records maintained by or for the Corporation and
regardless of the number of certificates which may be issued to evidence such
Share.
2. JUNIOR PREFERRED DIVIDEND REFERENCE DATES. To the extent
that all accrued dividends are not paid on each January 1 and July 1 of each
year beginning January 1, 1997 (the "Junior Preferred Dividend Reference
Dates"), all dividends which have accrued on each Share outstanding during the
six-month period (or other period in the case of the initial Junior Preferred
Dividend Reference Date) ending upon each such Junior Preferred Dividend
Reference Date will be accumulated and added to the Liquidation Value of such
Share.
3. DISTRIBUTION OF PARTIAL DIVIDEND PAYMENTS. If at any time
the Corporation elects to pay dividends in cash and pays less than the total
amount of dividends then accrued with respect to the Junior Preferred Stock,
such payment will be distributed ratably among the holders of the Junior
Preferred Stock based upon the aggregate accrued but unpaid dividends on the
Shares of such class held by each such holder.
B. LIQUIDATION. Upon any liquidation, dissolution or winding up of the
Corporation, the holders of the Series A Preferred Stock and Series B Preferred
Stock will be entitled on a PARI PASSU basis to be paid, before any distribution
or payment is made upon any of the Corporation=s equity securities (except with
respect to any distribution or payment made upon the Senior Preferred Stock), an
amount in cash equal to the aggregate Liquidation Value (plus all accrued and
unpaid dividends thereon) of all such Shares outstanding, and the holders of
Series A Preferred Stock and Series B Preferred Stock will not be entitled to
any further payment. The Corporation will mail written notice of such
liquidation, dissolution or winding up, not less than 10 days prior to the
payment date stated therein, to each record holder of Junior Preferred Stock.
Neither the consolidation or merger of the Corporation into or with any other
corporation or corporations, nor the sale or transfer by the Corporation of all
or any part of its assets, nor the reduction of the capital stock of the
Corporation, will be deemed to be a liquidation, dissolution or winding up of
the Corporation within the meaning of this Section 2.
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C. REDEMPTIONS.
1. OPTIONAL REDEMPTIONS. Subject to the terms and conditions
of the Senior Preferred Stock, the Corporation may at any time redeem all or any
portion of Series A Preferred Stock and Series B Preferred Stock then
outstanding at a price per Share equal to the Liquidation Value thereof (plus
all accrued and unpaid dividends thereon); PROVIDED, that all optional
redemptions pursuant to this Section 3A are made PRO RATA among the holders of
Junior Preferred Stock on the basis of the number of Shares held by each such
holder.
2. REDEMPTION PRICE. For each Share which is to be redeemed
the Corporation will be obligated on the Redemption Date to pay to the holder
thereof (upon surrender by such holder at the Corporation=s principal office of
the certificate representing such Share) an amount in immediately available
funds equal to the Liquidation Value thereof (plus all accrued and unpaid
dividends thereon). If the Corporation=s funds which are legally available for
redemption of Shares on any Redemption Date are insufficient to redeem the total
number of Shares to be redeemed on such date, those funds which are legally
available will be used to redeem the maximum possible number of Shares ratably
among the holders of the Shares to be redeemed based upon the aggregate
Liquidation Value of such Shares (plus all accrued and unpaid dividends thereon)
held by each such holder and other Shares not so redeemed shall remain issued
and outstanding until redeemed in accordance with the terms thereof. At any time
thereafter when additional funds of the Corporation are legally available for
the redemption of Shares, such funds will immediately be used to redeem the
balance of the Shares which the Corporation has become obligated to redeem on
any Redemption Date but which it has not redeemed.
3. NOTICE OF REDEMPTION. The Corporation will mail written
notice of each redemption of Junior Preferred Stock to each record holder not
more than 30 nor less than 10 days prior to the date on which such redemption is
to be made. Upon mailing any notice of redemption which relates to a redemption
at the Corporation=s option, the Corporation will become obligated to redeem the
total number of Shares specified in such notice at the time of redemption
specified therein. In case fewer than the total number of Shares represented by
any certificate are redeemed, a new certificate representing the number of
unredeemed Shares will be issued to the holder thereof without cost to such
holder within three business days after surrender of the certificate
representing the redeemed Shares.
4. DETERMINATION OF THE NUMBER OF EACH HOLDER=S SHARES TO BE
REDEEMED. Except as otherwise provided herein, the number of Shares of Junior
Preferred
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Stock to be redeemed from each holder thereof in redemptions hereunder will be
the number of Shares determined by multiplying the total number of Shares to be
redeemed times a fraction, the numerator of which will be the total number of
Shares then held by such holder and the denominator of which will be the total
number of Shares of Junior Preferred Stock then outstanding.
5. DIVIDENDS AFTER REDEMPTION DATE. No Share is entitled to
any dividends accruing after the date on which the Liquidation Value (plus all
accrued and unpaid dividends thereon) of such Share is paid in full. On such
date all rights of the holder of such Share will cease, and such Share will not
be deemed to be outstanding.
6. REDEEMED OR OTHERWISE ACQUIRED SHARES. Any Shares which are
redeemed or otherwise acquired by the Corporation will be canceled and will not
be reissued, sold or transferred.
7. OTHER REDEMPTIONS OR ACQUISITIONS. Subject to the terms and
conditions of the Senior Preferred Stock, neither the Corporation nor any
Subsidiary will redeem or otherwise acquire any Junior Preferred Stock, except
as expressly authorized herein or pursuant to a purchase offer made pro rata to
all holders of the Junior Preferred Stock on the basis of the number of Shares
of Junior Preferred Stock owned by each such holder.
8. SPECIAL REDEMPTIONS. If a Change in Control has occurred
then the Corporation shall give prompt written notice of such Change in Control,
describing in reasonable detail the definitive terms and date of consummation
thereof to each holder of Junior Preferred Stock, but in any event such notice
shall be given not more than 30 days nor less than ten days prior to the
occurrence of such Change in Control. Each holder of Junior Preferred Stock then
outstanding may require the Corporation to redeem all or any portion of the
Junior Preferred Stock owned by such holder at a price per Share equal to the
Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by
giving written notice to the Corporation of such election within 30 days of
receipt of the Corporation=s notice. Upon receipt by the Corporation of such
written notice from any holder, subject to the provisions of any loan agreement,
indenture or credit agreement evidencing indebtedness for borrowed money
incurred by the Corporation, the Corporation shall be obligated to redeem the
aggregate number of Shares specified therein within five days after receipt of
such notice from such holder. The term "Change in Control" means (i) the sale of
all or substantially all of the assets reflected on the Corporation=s most
recent consolidated balance sheet or capital stock of the Corporation, or (ii)
the acquisition, through stock purchase, merger or otherwise, by a Person or
group of Persons (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended) unaffiliated with Bruckmann, Rosser, Sherrill
& Co., L.P. (and its Permitted Transferees (as defined in the Shareholders
Agreement)) and management employees of the Corporation
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immediately prior to giving effect such transaction, of capital stock of the
Corporation representing, at any date of determination, (x) prior to the
consummation of an initial public offering of the Common Stock registered under
the Securities Act of 1933, as amended, 51% or more of the common equity
interest in the Corporation=s capital stock and (y) following the consummation
of such an initial public offering of the Common Stock, 33% or more of the
common equity interest in the Corporation=s capital stock.
9. PRIORITY OF JUNIOR PREFERRED STOCK. So long as any Senior
Preferred Stock or Junior Preferred Stock remains outstanding, neither the
Corporation nor any Subsidiary shall declare or pay any cash dividends or make
any cash distributions with respect to or redeem, purchase or otherwise acquire
for cash, directly or indirectly, any Common Stock, if at the time of or
immediately after any such redemption, purchase, acquisition, dividend or
distribution the Corporation has failed to pay the full amount of dividends
accrued on the Senior Preferred Stock and the Junior Preferred Stock or the
Corporation has failed to make any redemption of the Senior Preferred Stock or
the Junior Preferred Stock required hereunder; PROVIDED, that the Corporation
may purchase shares of Common Stock from employees of the Corporation and its
Subsidiaries upon termination of employment.
D. VOTING RIGHTS. The Shares of Junior Preferred Stock will not have
any voting rights attaching to them, except as required by applicable law.
E. REGISTRATION OF TRANSFER. The Corporation will keep at its principal
office a register for the registration of Junior Preferred Stock. Upon the
surrender of any certificate representing Junior Preferred Stock at such place,
the Corporation will, at the request of the record holder of such certificate,
execute and deliver (at the Corporation=s expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the surrendered certificate. Each such new certificate
will be registered in such name and will represent such number of Shares as is
requested by the holder of the surrendered certificate and will be substantially
identical in form to the surrendered certificate, and dividends will accrue on
the Junior Preferred Stock represented by such new certificate from the date to
which dividends have been fully paid on such Junior Preferred Stock represented
by the surrendered certificate.
F. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder will be satisfactory) of the
ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of any class of Junior Preferred Stock, and in the case of any
such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is an
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institutional investor its own agreement will be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation will
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate, and dividends
will accrue on the Junior Preferred Stock represented by such new certificate
from the date to which dividends have been fully paid on such lost, stolen,
destroyed or mutilated certificate.
G. DEFINITIONS. The following definitions apply to this Section III
only.
"LIQUIDATION VALUE" of any Share of (i) Series A Preferred
Stock as of any particular date will be an amount equal to $100.00 per Share,
plus any and all accumulated and unpaid dividends which are added to the
Liquidation Value pursuant to Section 1B above and (ii) any Share of Series B
Preferred Stock as of any particular date will be an amount equal to $35.00 per
Share, plus any and all accumulated and unpaid dividends which are added to the
Liquidation Value pursuant to Section 1B above.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.
"REDEMPTION DATE" as to any Share means the date specified in
the notice of any redemption at the Corporation=s option or the applicable date
specified herein in the case of any other redemption; PROVIDED, that no such
date will be a Redemption Date unless the applicable Liquidation Value (plus all
accrued and unpaid dividends thereon) is actually paid, or set aside for payment
in full on such date, and if not so paid or set aside for payment in full, the
Redemption Date will be the date on which such Liquidation Value (plus all
accrued and unpaid dividends thereon) is fully paid.
"SHAREHOLDERS AGREEMENT" means the Shareholders Agreement,
dated as of December 10, 1996, by and among the Corporation and certain
shareholders of the Corporation, as the same may be amended, restated, or
modified from time to time.
"SUBSIDIARY" means with respect to any Person, any
corporation, partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any
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contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by that Person or
one or more of the other Subsidiaries of that Person or a combination thereof,
or (ii) if a partnership, association or other business entity, a majority of
the partnership or other similar ownership interest thereof is at the time owned
or controlled directly or indirectly, by any person or one or more Subsidiaries
of that Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority ownership interest in a partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of partnership, association or other business entity gains
or losses or shall be or control the managing director or general partner of
such partnership, association or other business entity.
H. AMENDMENT AND WAIVER. No amendment, modification or waiver will be
binding or effective with respect to any provision of Section III without the
prior written consent of the holders of at least fifty percent (50%) of the
Shares outstanding at the time such action is taken; PROVIDED, that no such
amendment, modification or waiver which adversely and prejudicially affects the
Series B Preferred shall be effective without the prior written consent of the
holders of at least fifty (50%) of the Shares of Series B Preferred outstanding
at the time such action is taken.
I. NOTICES. Except as otherwise expressly provided, all notices
referred to herein will be in writing and will be delivered by registered or
certified mail, return receipt requested, postage prepaid and will be deemed to
have been given when so mailed (i) to the Corporation, at its principal
executive offices and (ii) to any stockholder, at such holder=s address as it
appears in the stock records of the Corporation (unless otherwise indicated by
any such holder).
COMMON STOCK
------------
Except as otherwise provided in this Section IV or as
otherwise required by applicable law, all shares of Common Stock shall be
identical in all respects and shall entitle the holders thereof to the same
rights and privileges, subject to the same qualifications, limitations and
restrictions.
A. VOTING RIGHTS. Except as otherwise provided in this Section IV or as
otherwise required by applicable law:
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a. the holders of Class A Common shall be entitled to
one vote per share on all matters to be voted on by the
Stockholders of the Corporation; and
b. the holders of Class B Common will not have any
voting rights.
B. DIVIDENDS. As and when dividends are declared or paid thereon,
whether in cash, property or securities of the Corporation, the holders of
Common Stock shall be entitled to participate in such dividends ratably on a per
share basis; PROVIDED, that (i) if dividends are declared which are payable in
shares of Common Stock, dividends shall be declared which are payable at the
same rate on all classes of Common Stock and dividends payable in shares of
Class A Common shall be payable to holders of Class A Common, and dividends
payable in shares of Class B Common shall be payable to holders of Class B
Common.
C. LIQUIDATION. Subject to the provisions of the Senior Preferred Stock
and the Junior Preferred Stock, the holders of the Common Stock shall be
entitled to participate ratably on a per share basis in all distributions to the
holders of Common Stock in any liquidation, dissolution or winding up of the
Corporation.
D. CONVERSION OF COMMON STOCK.
1 RIGHT TO CONVERT. Subject to Section 4B below, the holder or
holders of a majority of the outstanding shares of Class B Common shall be
entitled at any time to convert all or any portion of the shares of Class B
Common into the same number of shares of Class A Common. Any such conversion of
Class B Common into Class A Common will be effected among the holders of the
Class B Common on a pro rata basis based upon the number of shares of Class B
Common then outstanding.
2 SURRENDER OF CERTIFICATES. Each conversion of shares of
Class B Common into shares of Class A Common shall be effected by the surrender
of the certificate or certificates representing the shares to be converted at
the principal office of the Corporation at any time during normal business
hours, together with a written notice by the holder of shares of such Class B
Common stating that such holder desires to convert the shares, or a stated
number of the shares, of such Class B Common represented by such certificate or
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certificates into shares of Class A Common. Each conversion of Class B Common
shall be deemed to have been effected as of the close of business on the date on
which such certificate or certificates have been surrendered and such notice has
been received, and at such time the rights of the holder of the converted Class
B Common as such holder shall cease, and the person or persons in whose name or
names the certificate or certificates for shares of Class A Common are to be
issued upon such conversion shall be deemed to have become the holder or holders
of record of the shares of Class A Common represented thereby.
3 ISSUANCE OF CERTIFICATES. Promptly after the surrender of
certificates of Class B Common and the receipt of written notice, the
Corporation shall issue and deliver in accordance with the surrendering holder=s
instructions the certificate or certificates for the Class A Common issuable
upon such conversion.
4 NO CHARGE. The issuance of certificates for Class A Common
upon conversion of Class B Common will be made without charge to the holders of
such shares of any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of Class
A Common.
5 RESERVE SHARES. The Corporation shall at all times reserve
and keep available out of its authorized but unissued shares of Class A Common,
solely for the purpose of issuance upon the conversion of the Class B Common,
such number of shares of Class A Common issuable upon conversion of all
outstanding shares of Class B Common. All shares of Common Stock which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic securities exchange
upon which shares of Common Stock may be listed (except for official notice of
issuance which will be immediately transmitted by the Corporation upon
issuance).
6 CLOSING BOOKS. The Corporation shall not close its books
against the transfer of shares of Common Stock in any manner which would
interfere with the timely conversion of any shares of Common Stock.
E. STOCK SPLITS. If the Corporation in any manner subdivides or
combines the outstanding shares of one class of Common Stock, the outstanding
shares of each other class of Common Stock shall be proportionately subdivided
or combined in a similar manner.
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F. REGISTRATION OF TRANSFER. The Corporation shall keep at its
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of shares of Common Stock. Upon the surrender of
any certificate representing shares of any class of Common Stock at such place,
the Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation=s expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares of such class represented by the surrendered certificate and the
Corporation shall forthwith cancel such surrendered certificate. Each such new
certificate shall be registered in such name and shall represent such number of
shares of such class as is requested by the holder of the surrendered
certificate and shall be substantially identical in form to the surrendered
certificate. The issuance of new certificates shall be made without charge to
the holders of the surrendered certificates for any issuance tax in respect
thereof or other cost incurred by the Corporation in connection with such
issuance.
G. REPLACEMENT. Upon receipt of evidence reasonably satisfactory to the
Corporation (provided that an affidavit of the registered holder will be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing one or more shares of any class of Common Stock, and
in the case of any such loss, theft or destruction, upon receipt of indemnity
reasonably satisfactory to the Corporation (provided that if the holder is a
financial institution or other institutional investor its own agreement will be
satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
H. NOTICES. All notices referred to herein shall be in writing, and
shall be delivered by registered or certified mail, return receipt requested,
postage prepaid, and shall be deemed to have been given when so mailed (i) to
the Corporation at its principal executive offices and (ii) to any stockholder
at such holder=s address as it appears in the stock records of the Corporation
(unless otherwise specified in a written notice to the Corporation by such
holder).
I. ACTION BY WRITTEN CONSENT. Any action required to be taken at any
annual or special meeting of shareholders of the Corporation, or any action
which may be taken at any annual or special meeting of such shareholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken and bearing the dates
of signature of the shareholders who signed the consent or consents, shall be
signed by the holders of outstanding stock having not less than a majority of
the shares
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entitled to vote, or, if greater, not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted.
J. AMENDMENT AND WAIVER. No amendment or waiver of any provision of
this Section IV shall be effective without the prior consent of the holders of a
majority of the then outstanding shares of Common Stock voting as a single
class. For purposes of votes on amendments and waivers to this Section IV, each
share of Common Stock shall be entitled to one vote. No amendment directly to
any terms or provisions of any class of Common Stock that adversely affects such
class of Common Stock vis-a-vis any other class of Common Stock shall be
effective without the prior consent of the holders of a majority of the then
outstanding shares of such class of Common Stock (it being understood that the
issuance of preferred stock shall not be deemed to adversely affect the Common
Stock).
SIXTH: The amendment herein certified was authorized by the written
consent of all of the members of the Board of Directors of the Corporation
followed by the written consent of the holders of a majority of the outstanding
shares entitled to vote thereon of the Corporation.
* * * *
22
<PAGE>
IN WITNESS WHEREOF, the undersigned has subscribed this document as of
November 13, 1998 and does hereby affirm, under the penalties of perjury, that
the statements contained therein have been examined by the undersigned and are
true and correct.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ Richard Pyle
-----------------------------------
Name: Richard Pyle
Title: CFO
23
<PAGE>
Exhibit 4.5
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
FIRST AMENDMENT TO REGISTRATION RIGHTS AGREEMENT, dated as of
November 13, 1998 ("AGREEMENT"), by and among TOWN SPORTS INTERNATIONAL, INC., a
New York corporation (the "COMPANY"), BRUCKMANN, ROSSER, SHERRILL & CO., L.P., a
Delaware limited partnership ("BRS"), Richard Pyle, Mark Smith, Robert Giardina,
and Alexander Alimanestianu (collectively, the "EXECUTIVES"), CANTERBURY
MEZZANINE CAPITAL, L.P., a Delaware limited partnership ("CANTERBURY"),
CANTERBURY DETROIT PARTNERS, L.P., a Delaware limited partnership ("CANTERBURY
Detroit" and, together with Canterbury, the "CANTERBURY GROUP"), FARALLON
CAPITAL PARTNERS, L.P., a California limited partnership ("FCP"), FARALLON
CAPITAL INSTITUTIONAL PARTNERS, L.P., a California limited partnership ("FCIP"),
RR CAPITAL PARTNERS, L.P., a Delaware limited partnership ("RRC"), FARALLON
CAPITAL INSTITUTIONAL PARTNERS II, L.P., a California limited partnership ("FII"
and, together with FCP, FCIP, and RRC, the "FARALLON INVESTORS", and
individually, a "FARALLON INVESTOR"), and ROSEWOOD CAPITAL, L.P., a Delaware
limited partnership (the "ROSEWOOD INVESTOR").
WHEREAS, the Company, BRS, the Executives, Canterbury, the
Farallon Investors and certain other shareholders of the Company are parties to
that certain Registration Rights Agreement, dated as of December 10, 1996 (as
amended from time to time, the "REGISTRATION RIGHTS AGREEMENT"; capitalized
terms used and not otherwise defined herein having the definitions provided
therefor in the Registration Rights Agreement).
WHEREAS, Canterbury Detroit has acquired a warrant (together
with all warrants issued in substitution or replacement therefor, the "DETROIT
WARRANT") exercisable for shares of the Company's Class A Common, pursuant to
the Warrant Agreement, dated as of the date hereof, by and among Canterbury
Detroit, Canterbury and the Company (as the same may be amended, restated or
modified from time to time, the "SECOND WARRANT AGREEMENT").
WHEREAS, Canterbury has acquired warrants (together with all
warrants issued in substitution or replacement therefor, the "MEZZANINE
WARRANT") exercisable for shares of Class A Common pursuant to the Second
Warrant Agreement
WHEREAS, (i) the Farallon Investors intend to acquire warrants
(together with all warrants issued in substitution or replacement therefor, the
"FARALLON WARRANT") exercisable for shares of Class A Common, and (ii) the
Rosewood Investor intends to acquire a warrant (together with all warrants
issued in substitution or replacement therefor, the "ROSEWOOD WARRANT")
exercisable for shares of Class A Common, in each case, pursuant to the Warrant
Agreements to be entered into by and among the Farallon Investors, the Rosewood
Investor and the Company, substantially in same form as the Second Warrant
Agreement (as the same may be amended, restated or modified from time to time,
the "THIRD WARRANT AGREEMENTS").
<PAGE>
WHEREAS, the Farallon Investors and the Rosewood Investor
intend to acquire shares of the Company's Senior Preferred Stock pursuant to the
Second Senior Preferred Stock Purchase Agreement to be entered into by and among
the Company, the Farallon Investors, and the Rosewood Investor substantially in
the same form as the Stock Purchase Agreement, dated as of the date hereof, by
and among the Company, Canterbury Mezzanine, and Canterbury Detroit (as the same
may be amended, restated or modified from time to time, the "SECOND SENIOR
PREFERRED STOCK PURCHASE AGREEMENT").
WHEREAS, the parties hereto wish to amend the Registration
Rights Agreement in accordance with the terms thereof as provided herein.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement
hereby agree as follows:
1. AMENDMENTS TO SECTION 1X"DEFINITIONS". (a) Section 1 of the
Registration Rights Agreement is hereby amended by inserting the following
definitions in alphabetical order in such Section 1:
"DETROIT WARRANT" means that certain stock purchase warrant
(together with all warrants issued in substitution or replacement therefor)
issued by the Company to Canterbury Detroit pursuant to the terms and conditions
of the Second Warrant Agreement and exercisable for shares of Class A Common.
"FARALLON WARRANT" means that certain stock purchase warrant
(together with all warrants issued in substitution or replacement therefor)
exercisable for shares of Class A Common issued by the Company to the Farallon
Investors pursuant to the Third Warrant Agreements.
"MEZZANINE WARRANT" means that certain stock purchase warrant
(together with all warrants issued in substitution or replacement therefor)
issued by the Company to Canterbury pursuant to the terms and conditions of the
Second Warrant Agreement and exercisable for shares of Class A Common.
"ROSEWOOD REGISTRABLE SECURITIES" means (i) any shares of
Common Stock issued or issuable, whether upon conversion of any shares of Senior
Preferred Stock or upon exercise of any portion of the Rosewood Warrant, or
otherwise, to the Rosewood Investor or its affiliates or partners on or after
the date hereof and (ii) any shares of capital stock of the Company issued or
issuable with respect to the securities referred to in clause (i) by way of a
stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. For purposes of
this Agreement, a Person will be deemed to be a holder of Rosewood Registrable
Securities whenever such Person has the right to acquire directly or indirectly
<PAGE>
such Rosewood Registrable Securities (upon conversion or exercise in connection
with a transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected. Such securities will cease to be Rosewood
Registrable Securities when sold pursuant to Rule 144 or any offering registered
under the Securities Act.
"ROSEWOOD WARRANT" means that certain stock purchase warrant
(together with all warrants issued in substitution or replacement therefor)
exercisable for shares of Class A Common issued by the Company to the Rosewood
Investor pursuant to the Third Warrant Agreements.
"SECOND WARRANT AGREEMENT" means that certain Warrant
Agreement, dated as of the date hereof, by and among Canterbury Detroit,
Canterbury, and the Company (as the same may be amended, restated or modified
from time to time).
"SENIOR PREFERRED STOCK" means the Company's Senior Preferred
Stock, par value $1.00 per share.
"SHAREHOLDER WARRANTS" means the Warrant, the Mezzanine
Warrant, the Detroit Warrant, the Farallon Warrant (when and if issued), and the
Rosewood Warrant (when and if issued).
"THIRD WARRANT AGREEMENTS" means the Warrant Agreements to be
entered into by and among the Farallon Investors, the Rosewood Investor, and the
Company substantially in the same form as the Second Warrant Agreement (as the
same may be amended, restated or modified from time to time) (when and if
executed and delivered by the parties thereto).
(b) Section 1 of the Registration Rights Agreement is hereby amended by
deleting the definitions of "Canterbury Registrable Securities", "Farallon
Registrable Securities", and "Registrable Securities" and substituting the
following definitions therefor:
"CANTERBURY REGISTRABLE SECURITIES" means (i) any shares of
Common Stock held by Canterbury or Canterbury Detroit or issued or issuable,
whether upon conversion of any shares of Senior Preferred Stock or upon exercise
of any portion of the Warrant, the Detroit Warrant, or the Mezzanine Warrant, or
otherwise, to Canterbury, Canterbury Detroit, or their respective affiliates or
partners on or after December 10, 1996 and (ii) any shares of capital stock of
the Company issued or issuable with respect to the securities referred to in
clause (i) by way of a stock dividend or stock split or in connection with a
combination of shares, recapitalization, merger, consolidation or other
reorganization. For purposes of this Agreement, a Person will be deemed to be a
holder of Canterbury Registrable Securities whenever such Person has the right
to acquire directly or indirectly such Canterbury Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected. Such
-3-
<PAGE>
securities will cease to be Canterbury Registrable Securities when sold pursuant
to Rule 144 or any offering registered under the Securities Act.
"FARALLON REGISTRABLE SECURITIES" means (i) any shares of
Common Stock held by the Farallon Investors or issued or issuable, whether upon
conversion of any shares of Senior Preferred Stock or upon exercise of any
portion of the Farallon Warrant, or otherwise, to the Farallon Investors or
their respective affiliates or partners on or after December 10, 1996 and (ii)
any shares of capital stock of the Company issued or issuable with respect to
the securities referred to in clause (i) by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this Agreement, a Person
will be deemed to be a holder of Farallon Registrable Securities whenever such
Person has the right to acquire directly or indirectly such Farallon Registrable
Securities (upon conversion or exercise in connection with a transfer of
securities or otherwise, but disregarding any restrictions or limitations upon
the exercise of such right), whether or not such acquisition has actually been
effected. Such securities will cease to be Farallon Registrable Securities when
sold pursuant to Rule 144 or any offering registered under the Securities Act.
"REGISTRABLE SECURITIES" means the BRS Registrable Securities,
the Farallon Registrable Securities, the Rosewood Registrable Securities, the
Canterbury Registrable Securities and the Executive Registrable Securities.
2. AMENDMENTS TO SECTION 10X"NOTICES". Section 10 of the Registration
Rights Agreement is hereby amended to insert the following address for notices,
demands and other communications to be sent to Canterbury Detroit after such
address for Canterbury:
To Canterbury Detroit:
Canterbury Detroit Partners, L.P.
600 Fifth Avenue, 23rd Floor
New York, New York 10020
Attention: Patrick N.W. Turner
Facsimile No.: (212) 332-1584
With a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700
To Rosewood:
Rosewood Capital Partners, L.P.
-4-
<PAGE>
One Maritime Plaza
Suite 1330
San Francisco, California 94111
Attention: Kyle A. Anderson
Facsimile No.: (415) 362-1192
With a copy to (which shall not constitute notice to
Rosewood):
Preston Gates & Ellis, LLP
One Maritime Plaza
Suite 2400
San Francisco, California 94111
Attention: Lawrence B. Low, Esq.
Facsimile No.: (415) 788-8819
3. AMENDMENTS TO SECTION 11X"MISCELLANEOUS". Section 11 of the
Registration Rights Agreement is hereby amended by inserting the following
clause (k) immediately after clause (j) in such Section 11:
(k) JOINDER BY THE ROSEWOOD INVESTOR. The parties to this
Agreement acknowledge and agree that the Rosewood Investor shall not have any
rights, duties or obligations under this Agreement unless and until the Rosewood
Investor actually acquires shares of Senior Preferred Stock and the Shareholder
Warrants to be issued to it pursuant to the terms and conditions of the Second
Senior Preferred Stock Purchase Agreement. Effective upon such issuance, the
Rosewood Investor shall automatically become bound by the terms and provisions
of this Agreement as indicated herein.
4. MISCELLANEOUS.
(a) DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(b) GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
(c) COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
-5-
<PAGE>
(d) SUCCESSORS AND ASSIGNS. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto will bind and inure
to the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(e) REFERENCES. Any reference to the Registration Rights
Agreement contained in any notice, request, certificate, or other document
executed concurrently with or after the execution and delivery of this Agreement
shall be deemed to include this Agreement unless the context shall otherwise
require.
(f) CONTINUED EFFECTIVENESS. Notwithstanding anything
contained herein, the terms of this Agreement are not intended to and do not
serve to effect a novation as to the Registration Rights Agreement. The parties
hereto expressly do not intend to extinguish the Registration Rights Agreement.
Instead, it is the express intention of the parties hereto to reaffirm the
obligations created under the Registration Rights Agreement. The Registration
Rights Agreement as amended hereby remains in full force and effect.
* * * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
TOWN SPORTS INTERNATIONAL, INC.
By:__/s/ Richard Pyle
Name: Richard Pyle
Title: CFO
BRUCKMANN, ROSSER, SHERRILL & CO., L.P.
By: BRS Partners, Limited Partnership
Its: General Partner
By:___/s/ Stephen Edwards
Name: Stephen Edwards
Title: Principal
CANTERBURY DETROIT PARTNERS, L.P.
By: Canterbury Detroit, LLC
Its: General Partner
By:____/s/ Nicholas Dunphy
Name: Nicholas Dunphy
Title: Member
CANTERBURY MEZZANINE CAPITAL, L.P.
By: Canterbury Capital, LLC
Its: General Partner
By:___/s/ Nicholas Dunphy
Name: Nicholas Dunphy
Title: Member
<PAGE>
FARALLON CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:_/s/ Jason Fish
Name: Jason Fish
Title: Principal
FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:_/s/ Jason Fish
Name: Jason Fish
Title: Principal
RR CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:_/s/ Jason Fish
Name: Jason Fish
Title: Principal
FARALLON CAPITAL INSTITUTIONAL PARTNERS II,
L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
<PAGE>
By:_/s/ Jason Fish
Name: Jason Fish
Title: Principal
ROSEWOOD CAPITAL, L.P.
By: Rosewood Capital Associates, L.P.
its General Partner
By:__/s/ Kyle A. Anderson
Name: Kyle A. Anderson
Title: Principal
<PAGE>
EXECUTIVE SIGNATURE PAGE
/s/ Richard Pyle
- --------------------------
Richard Pyle
/s/Mark Smith
- --------------------------
Mark Smith
/s/Robert Giardina
- --------------------------
Robert Giardina
/s/Alexander Alimanestianu
- --------------------------
Alexander Alimanestianu
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT ("AGREEMENT"), dated as of November
13, 1998, by and among TOWN SPORTS INTERNATIONAL, INC., a New York corporation
(the "COMPANY"), CANTERBURY MEZZANINE CAPITAL, L.P., a Delaware limited
partnership ("CANTERBURY MEZZANINE"), and CANTERBURY DETROIT PARTNERS, L.P., a
Delaware limited partnership ("CANTERBURY DETROIT" and, together with Canterbury
Mezzanine, the "INVESTORS"; and individually, an "INVESTOR"). Capitalized terms
used herein but not otherwise defined shall have the meanings assigned to such
terms in Section 1.
WHEREAS, the Company and the Investors desire to entire into
an agreement pursuant to which each Investor will purchase from the Company, and
the Company will sell to each such Investor (i) the number of shares of the
Company's Senior Preferred Stock, par value $1.00 per share, corresponding to
such Investor on SCHEDULE A attached hereto (the "PREFERRED STOCK") and (ii) a
number of stock purchase warrants (the "WARRANTS") exercisable for 49,882.68
shares of the Company's Class A Common Stock, par value $.001 per share (the
"CLASS A COMMON"), as adjusted pursuant to the terms of such Warrants,
corresponding to such Investor on Schedule A.
NOW THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties to this Agreement agree
as follows:
1. DEFINITIONS. As used herein, the following terms shall have
the following meanings:
"ACCREDITED INVESTOR" has the meaning ascribed to such term in
Regulation D of the Securities Act, as amended.
"AFFILIATE" shall mean, 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" (including,
with 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).
"AMENDED REGISTRATION RIGHTS AGREEMENT" means the First
Amendment to Registration Rights Agreement, dated as of the date hereof, by and
among the Company and certain shareholders of the Company, as the same may be
amended, restated or modified from time to time.
<PAGE>
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization, any other entity or a government
entity (or any department, agency or political subdivision thereof.)
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of December 10, 1996, by and among the Company and certain
other parties thereto, as the same may be amended, restated or modified from
time to time.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHAREHOLDERS AGREEMENT" means the Amended and Restated
Shareholders Agreement, dated as of the date hereof, by and among the Company,
the Investors and certain shareholders of the Company, as the same may be
amended, restated or modified from time to time.
"UNDERLYING STOCK" means (i) the Class A Common issued or
issuable upon exercise of the Warrants, and (ii) with respect to such shares of
Class A Common, all shares issued with respect to, or as a result of, a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation, or other reorganization.
"WARRANT AGREEMENT" means the Warrant Agreement, dated as of
the date hereof, by and among Canterbury Mezzanine, Canterbury Detroit and the
Company (as the same may be amended, restated or modified from time to time).
2. AUTHORIZATION AND CLOSING.
(a) AUTHORIZATION. The Company shall authorize the issuance
and/or sale to (i) Canterbury Mezzanine of 10,000 shares of Preferred Stock (the
"MEZZANINE PREFERRED") and 33,255.12 Warrants (the "MEZZANINE WARRANTS") and
(ii) Canterbury Detroit of 5,000 shares of Preferred Stock (the "DETROIT
PREFERRED") and 16,627.56 Warrants (the "DETROIT WARRANTS"). The Preferred Stock
shall have the terms and conditions set forth in EXHIBIT A attached hereto. The
Warrants shall be in the form of EXHIBIT B attached hereto.
(b) PURCHASE AND SALE. Subject to the terms and conditions of
this Agreement, at the Closing, (i) Canterbury Mezzanine agrees to purchase from
the Company, and the Company agrees to sell to Canterbury Mezzanine (x) the
Mezzanine Preferred at a price of $1,000 per share and (y) the Mezzanine
Warrants, for an aggregate purchase price of $10,000,000 (the "MEZZANINE
PURCHASE PRICE"), and (ii) Canterbury Detroit agrees to purchase from the
Company, and the Company agrees to sell to Canterbury Detroit (x) the Detroit
Preferred at a price of $1,000 per share and (y) the Detroit Warrants, for an
aggregate purchase price of $5,000,000 (the "DETROIT PURCHASE PRICE").
2
<PAGE>
(c) CLOSING. The closing of the purchase and sale of the
Mezzanine Preferred and the Detroit Preferred and the issuance of the Mezzanine
Warrants and the Detroit Warrants to Canterbury Mezzanine and Canterbury
Detroit, as the case may be, (the "CLOSING") shall take place at the offices of
Kirkland & Ellis, Citicorp Center, 153 East 53rd Street, New York, New York,
10022 on the date hereof or at such other place or such other time or date as
the Company may designate. At the Closing, the Company shall deliver to
Canterbury Mezzanine and Canterbury Detroit, certificates evidencing the
Mezzanine Preferred and the Detroit Preferred, respectively, and the Mezzanine
Warrants and the Detroit Warrants, respectively, each registered in the name of
Canterbury Mezzanine or Canterbury Detroit, respectively, or its nominee, upon
payment of the Mezzanine Purchase Price or the Detroit Purchase Price,
respectively, by a cashier's or certified check, or by wire transfer of
immediately available funds to an account designated by the Company.
3. RESTRICTIONS ON TRANSFER.
(a) SHAREHOLDERS AGREEMENT. Each Investor hereby acknowledges
and understands that such Investor is a party to the Shareholders Agreement
which governs and restricts the Investor's ability to transfer any Common Stock
(including the Underlying Stock when issued) and other matters relating to the
Investor as a shareholder of the Company.
(b) LEGEND. The certificates representing the Preferred Stock
and the Underlying Stock (upon the issuance of such Underlying Stock) will bear
the legend set forth in Section 7 of the Shareholders Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a
material inducement to the Investors to enter into this Agreement and purchase
the Common Stock, the Company hereby represents and warrants to the Investors as
follows:
(a) ORGANIZATION. It is a corporation duly organized, validly
existing and in good standing under the laws of New York.
(b) AUTHORIZATION. It has full corporate power and authority
to execute and deliver this Agreement and to perform its obligations hereunder
and to consummate the transactions contemplated hereby. This Agreement has been
duly executed and delivered by it and constitutes the valid and binding
agreement of it, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency and other similar laws affecting the
enforceability of creditors' rights generally, general equitable principles and
the discretion of courts in granting equitable remedies.
(c) NO CONFLICT. The execution, delivery and performance by it
of this Agreement, the performance by it of the transactions contemplated
thereby and the fulfillment by it of and compliance by it with the terms and
conditions hereof does not and will not, violate or conflict with any terms or
provisions of (i) its articles of incorporation, bylaws or other organizational
documents, (ii) any contract, deed, lease or other agreement to which it is a
party or
3
<PAGE>
to which any of its assets are subject or (iii) any judgment, decree, order,
statute, rule or regulation applicable to it or any of its assets, except for
such violations which could not reasonably be expected to materially impair or
delay its ability to consummate the transactions contemplated hereby. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any government agency or public or regulatory unit, agency, body or
authority with respect to it is required in connection with its execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby other than any of the foregoing, the failure of
which to receive or make, as the case may be, could not reasonably be expected
to materially impair or delay its ability to consummate the transactions
contemplated hereby.
(d) CAPITALIZATION. The Warrants and Preferred Stock acquired
hereunder and the capitalization of the Company as set forth on SCHEDULE B
attached hereto (which is, as of the date hereof, true and correct as to all
outstanding equity securities of the Company outstanding on a fully diluted
basis) have been validly authorized, issued and are fully paid and
nonassessable.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. As a
material inducement to the Company to enter into this Agreement and sell the
Preferred Stock and issue the Warrants to the Investors, each Investor,
severally and not jointly, hereby represents and warrants to the Company as
follows:
(a) CAPACITY AND POWER. The Investor has full capacity, power
and authority to execute and deliver this Agreement, to perform its obligations
under this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by the Investor and
constitutes a valid and binding agreement, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, insolvency and other similar
laws affecting the enforceability of creditors' rights generally, general
equitable principles and the discretion of courts in granting equitable
remedies.
(b) NO CONFLICT. The execution, delivery and performance by
the Investor of this Agreement and the transactions contemplated hereby and the
fulfillment by it of and compliance by it with the terms and conditions of this
Agreement do not and will not, violate or conflict with any terms or provisions
of (i) any contract, deed, lease or other agreement to which its is a party or
to which any of it assets are subject or (ii) any judgment, decree, order,
statute, rule or regulation applicable to, it or any of its assets, except for
such violations which could not reasonably be expected to materially impair or
delay its ability to consummate the transactions contemplated hereby. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any government agency or public or regulatory unit, agency, body or
authority with respect to its is required in connection with its execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby other than any of the foregoing, the failure of
which to receive or make, as the case may be, could not reasonably be expected
to materially impair or delay its ability to consummate the transactions
contemplated hereby.
4
<PAGE>
(c) INVESTMENT. The Investor (a) understands that the
Preferred Stock and the Warrants have not been, and will not be, registered
under the Securities Act, or under any state securities laws, and are being
offered and sold in reliance upon federal and state exemptions for transactions
not involving any public offering, (b) is acquiring the Preferred Stock and the
Warrants solely for its own account for investment purposes, and not with a view
to the distribution thereof, (c) is a sophisticated investor with knowledge and
experience in business and financial matters, (d) has received certain
information concerning the Company and has had the opportunity to obtain
additional information as desired in order to evaluate the merits and the risks
inherent in holding the Preferred Stock and the Warrants, (e) is able to bear
the economic risk and lack of liquidity inherent in holding the Preferred Stock
and the Warrants, and (f) is an Accredited Investor.
6. CLOSING FEES. As a material inducement to the Investors to
enter into this agreement and purchase the Preferred Stock and receive the
Warrants, the Company agrees to pay to the Investors on the Closing Date (i)
reasonable attorneys' fees and out-of-pocket expenses of legal counsel to the
Investors, and (ii) a closing fee of $25,000.00 in the aggregate.
7. CONDITIONS TO CLOSING. The obligations of each of
Canterbury Mezzanine and Canterbury Detroit to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment at or prior
to the Closing of each of the following conditions, any and all of which may be
waived in whole or in part by Canterbury Mezzanine or Canterbury Detroit, as the
case may be, to the extent permitted by applicable law:
(a) CLOSING DELIVERIES. The Company shall have delivered to
each of Canterbury Mezzanine and Canterbury Detroit the following closing
documents in form and substance reasonably acceptable to its counsel:
(i) a certificate of the Secretary of the Company,
dated the Closing Date, as to the incumbency of any officer of the Company,
executing this Agreement or any document related thereto and covering such other
matters as Canterbury Mezzanine or Canterbury Detroit may reasonably request;
(ii) certified copies of the resolutions of the
Company's Board of Directors authorizing the execution, delivery and
consummation of this Agreement and the transactions contemplated hereunder;
(iii) a good standing certificate with respect to the
Company, together with certified charter documents of the Company from the
Secretary of State of the Company=s jurisdiction of incorporation, together with
certified copies of the bylaws of the Company;
(iv) certificates evidencing the Mezzanine Preferred,
the Detroit Preferred, the Mezzanine Warrants, and the Detroit Warrants;
5
<PAGE>
(v) executed copies of (A) this Agreement, (B) the
First Amendment to Warrant Agreement, dated as of the date hereof, by and
between the Company and Canterbury Mezzanine, (C) the Warrant Agreement, dated
as of the date hereof, by and among the Company, Canterbury Mezzanine, and
Canterbury Detroit, (D) executed certificates evidencing the Warrants, (E) the
Amended Registration Rights Agreement, and (F) the Shareholders Agreement; and
(vi) an opinion of Kirkland & Ellis, counsel to the
Company, dated as of the date hereof, in form and substance reasonably
acceptable to counsel for the Investors.
8. MISCELLANEOUS.
(a) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Agreement, the Shareholders Agreement, the Registration Rights
Agreement, the Amended Registration Rights Agreement, and the Warrant Agreement
embody the complete agreement and understanding among the parties hereto with
respect to the subject matter hereof and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
(c) SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors and permitted assigns. No party may assign either this
Agreement or any of its rights, interests, or obligations hereunder without the
prior written approval of the other. Notwithstanding anything herein to the
contrary, each of Canterbury Mezzanine and Canterbury Detroit may, in the
ordinary course of its business and in accordance with applicable law, at any
time assign to an Affiliate of such Person or to one or more banks or other
financial institutions or entities which are not then in direct competition with
the Company, all or any part of its rights and obligations under this Agreement;
PROVIDED, that each of Canterbury Mezzanine and Canterbury Detroit may make any
such assignment only if it is required to do so pursuant to its limited
partnership agreement or in connection with any dissolution of such Person
pursuant to its limited partnership agreement.
(d) COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
6
<PAGE>
(e) REMEDIES. The Company acknowledges that the Preferred
Stock and Warrants are unique and recognizes and affirms that in the event of a
breach of this Agreement by the Company or any of the Investors, money damages
may be inadequate and the Investor, or the Company, as the case may be, may have
no adequate remedy at law. Accordingly, the Company and each of the Investors
agrees that such Investor or the Company, as the case may be, shall have the
right, in addition to any other rights and remedies existing in its favor at law
or in equity, to enforce its rights and the obligations of the Company or such
Investor (as the case may be) hereunder not only by an action or actions for
damages but also by an action or actions for specific performance, injunctive
and/or other equitable relief (without posting of bond or other security).
(f) NOTICES. All notices, demands, or other communications
to be given or delivered under or by reason of the provision of this Agreement
will be in writing and will be deemed given when delivered personally, mailed by
certified or registered mail, return receipt requested, postage prepaid, or sent
via nationally recognized overnight courier, or sent via facsimile to the
recipient. Such notices, demands and other communications will be sent to the
address indicated below:
If to the Company, to:
Town Sports International, Inc.
888 Seventh Avenue, 25th Floor
New York, New York 10106
Attention: Alex Alimanestianu
Facsimile No.: (212) 246-8422
with copies (which shall not constitute notice to the
Company) to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900
AND
Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799
If to Canterbury Mezzanine:
Canterbury Mezzanine Capital, L.P.
600 Fifth Avenue, 23rd Floor
7
<PAGE>
New York, New York 10020
Attention: Patrick N.W. Turner
Facsimile No.: (212) 332-1589
with a copy (which shall not constitute notice to
Canterbury Mezzanine) to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700
If to Canterbury Detroit:
Canterbury Detroit Partners, L.P.
600 Fifth Avenue, 23rd Floor
New York, New York 10020
Attention: Nicholas B. Dunphy
Facsimile No.: (212) 332-1589
with a copy (which shall not constitute notice to
Canterbury Detroit) to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700
or such other address or to the attention of such other Person as the recipient
party shall have specified by prior written notice to the sending party.
(G) GOVERNING LAW. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE
(WHETHER OF THE STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE
THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW
YORK.
(h) AMENDMENT AND WAIVER. The provisions of this Agreement
may be amended and waived only with the prior written consent of the parties. No
waiver by either party of any default, misrepresentation, or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend to
any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
8
<PAGE>
(i) TIME OF THE ESSENCE; COMPUTATION OF TIME. Time is of the
essence for each and every provision of this Agreement. Whenever the last day
for the exercise of any privilege or the discharge of any duty hereunder shall
fall upon a Saturday, Sunday, or any date on which banks in New York, New York
are authorized to be closed, the party having such privilege or duty may
exercise such privilege or discharge such duty on the next succeeding day which
is a regular business day.
(j) WAIVER OF JURY TRIAL. Each of the parties hereto waives
any right it may have to trial by jury in respect of any litigation based on,
arising out of, under or in connection with this Agreement or any course of
conduct, course of dealing, verbal or written statement or action of any party
hereto.
(k) DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
* * * * *
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stock
Purchase Agreement on the date first above written.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ Richard Pyle
Name: Richard Pyle
Title: CFO
CANTERBURY MEZZANINE CAPITAL, L.P.
By: Canterbury Capital, LLC
Its: General Partner
By: /s/ Nicholas Dunphy
Name: Nicholas Dunphy
Title: Member
CANTERBURY DETROIT PARTNERS, L.P.
By: Canterbury Detroit, LLC
Its: General Partner
By: /s/ Nicholas Dunphy
Name: Nicholas Dunphy
Title: Member
Schedule A
<TABLE>
<CAPTION>
INVESTOR PREFERRED STOCK WARRANTS PURCHASE PRICE
- -------- --------------- --------- --------------
<S> <C> <C> <C>
Canterbury Mezzanine Capital, L.P. 10,000 33,255.12 $10,000,000.00
Canterbury Detroit Partners, L.P. 5,000 16,627.56 $ 5,000,000.00
--------- --------- --------------
Total: 15,000 49,882.68 $15,000,000.00
</TABLE>
<PAGE>
SCHEDULE B
[CAPITALIZATION OF THE COMPANY]
12
<PAGE>
EXHIBIT A
[PREFERRED STOCK TERMS]
<PAGE>
EXHIBIT B
[FORM OF WARRANT]
<PAGE>
Exhibit 10.4
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT ("AGREEMENT"), dated as of November
30,1998, by and among TOWN SPORTS INTERNATIONAL, INC., a New York corporation
(the "COMPANY"), FARALLON CAPITAL PARTNERS, L.P. ("FCP"), FARALLON CAPITAL
INSTITUTIONAL PARTNERS, L.P. ("FCIP"), FARALLON CAPITAL INSTITUTIONAL PARTNERS
II, L.P. ("FCIP II") and RR CAPITAL PARTNERS, L.P. ("RR", and together with FCP,
FCIP and FCIP II, the "FARALLON INVESTORS", and individually, a "FARALLON
INVESTOR") and ROSEWOOD CAPITAL, L.P. (the "ROSEWOOD INVESTOR", and together
with the Farallon Investors, the "INVESTORS", and individually, an "INVESTOR").
Capitalized terms used herein but not otherwise defined shall have the meanings
assigned to such terms in Section 1.
WHEREAS, the Company and the Investors desire to entire into
an agreement pursuant to which each Investor will purchase from the Company, and
the Company will sell to each such Investor (i) the number of shares of the
Company's Senior Preferred Stock, par value $1.00 per share, corresponding to
such Investor on SCHEDULE A attached hereto (the "PREFERRED STOCK") and (ii) a
number of stock purchase warrants (the "WARRANTS") exercisable for 89,538.10
shares of the Company's Class A Common Stock, par value $.001 per share (the
"CLASS A COMMON"), as adjusted pursuant to the terms of such Warrants,
corresponding to such Investor on SCHEDULE A attached hereto.
NOW THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties to this Agreement agree
as follows:
1. DEFINITIONS. As used herein, the following terms shall have
the following meanings:
"ACCREDITED INVESTOR" has the meaning ascribed to such term in
Regulation D of the Securities Act, as amended.
"AFFILIATE" shall mean, 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" (including,
with 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).
"AMENDED REGISTRATION RIGHTS AGREEMENT" means the First
Amendment to Registration Rights Agreement, dated as of November 13, 1998, by
and among the Company and
<PAGE>
certain shareholders of the Company, as the same may be amended, restated or
modified from time to time.
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization, any other entity or a government
entity (or any department, agency or political subdivision thereof.)
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of December 10, 1996, by and among the Company and certain
other parties thereto, as the same may be amended, restated or modified from
time to time.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHAREHOLDERS AGREEMENT" means the Amended and Restated
Shareholders Agreement, dated as of November 13, 1998, by and among the Company,
the Investors and certain shareholders of the Company, as the same may be
amended, restated or modified from time to time.
"UNDERLYING STOCK" means (i) the Class A Common issued or
issuable upon exercise of the Warrants, and (ii) with respect to such shares of
Class A Common, all shares issued with respect to, or as a result of, a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation, or other reorganization with respect to
such Class A Shares.
"WARRANT AGREEMENT" means the Warrant Agreement, dated as of
the date hereof, by and among the Investors and the Company (as the same may be
amended, restated or modified from time to time).
2. AUTHORIZATION AND CLOSING.
1. AUTHORIZATION. The Company shall authorize the issuance
and/or sale to the Investors of 25,000 shares of Preferred Stock and 89,538.10
Warrants, in the amounts set forth for each Investor on Schedule A. The
Preferred Stock shall have the terms and conditions set forth in EXHIBIT A
attached hereto. The Warrants shall be in the form of EXHIBIT B attached hereto.
2. PURCHASE AND SALE. Subject to the terms and conditions of
this Agreement, at the Closing, each of the Investors, severally, and not
jointly and severally, agrees to purchase from the Company, and the Company
agrees to sell to such Investor, that number of (i) shares of Preferred Stock
and (ii) Warrants, in each case, set forth opposite such Investor's name on
Schedule A, for the aggregate purchase price set forth opposite such Investor's
name on SCHEDULE A (the "PURCHASE PRICE").
3. CLOSING. The closing of the purchase and sale of the
Preferred Stock and the issuance of the Warrants to the Investors, as the case
may be, (the "CLOSING") shall take place at the offices of Kirkland & Ellis,
Citicorp Center, 153 East 53rd Street, New York, New York, 10022 on the date
hereof or at such other place or such other time or date as the Company may
designate. At the Closing, the Company shall deliver to the Investors
certificates evidencing the Preferred Stock and Warrants, each registered in the
name of the applicable Investor or
<PAGE>
its nominee, upon payment of the Purchase Price, by a cashier's or certified
check, or by wire transfer of immediately available funds to an account
designated by the Company.
3. RESTRICTIONS ON TRANSFER.
1. SHAREHOLDERS AGREEMENT. Each Investor hereby acknowledges
and understands that such Investor is a party to the Shareholders Agreement
which governs and restricts the Investor's ability to transfer any Common Stock
(including the Underlying Stock when issued) and other matters relating to the
Investor as a shareholder of the Company.
2. LEGEND. The certificates representing the Preferred Stock
and the Underlying Stock (upon the issuance of such Underlying Stock) will bear
the legend set forth in Section 7 of the Shareholders Agreement.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. As a
material inducement to the Investors to enter into this Agreement and purchase
the Common Stock, the Company hereby represents and warrants to the Investors as
follows:
1. ORGANIZATION. It is a corporation duly organized, validly
existing and in good standing under the laws of New York.
2. AUTHORIZATION. It has full corporate power and authority to
execute and deliver this Agreement and to perform its obligations hereunder and
to consummate the transactions contemplated hereby. This Agreement has been duly
executed and delivered by it and constitutes the valid and binding agreement of
it, enforceable against it in accordance with its terms, subject to applicable
bankruptcy, insolvency and other similar laws affecting the enforceability of
creditors' rights generally, general equitable principles and the discretion of
courts in granting equitable remedies.
3. NO CONFLICT. The execution, delivery and performance by it
of this Agreement, the performance by it of the transactions contemplated
thereby and the fulfillment by it of and compliance by it with the terms and
conditions hereof does not and will not, violate or conflict with any terms or
provisions of (i) its articles of incorporation, bylaws or other organizational
documents, (ii) any contract, deed, lease or other agreement to which it is a
party or to which any of its assets are subject or (iii) any judgment, decree,
order, statute, rule or regulation applicable to it or any of its assets, except
for such violations which could not reasonably be expected to materially impair
or delay its ability to consummate the transactions contemplated hereby. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any government agency or public or regulatory unit, agency, body or
authority with respect to it is required in connection with its execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby other than any of the foregoing, the failure of
which to receive or make, as the case may be, could not reasonably be expected
to materially impair or delay its ability to consummate the transactions
contemplated hereby.
4. CAPITALIZATION. The Warrants and Preferred Stock acquired
hereunder and the capitalization of the Company as set forth on SCHEDULE B
attached hereto (which is, as of the date hereof, true and correct as to all
outstanding equity securities of the Company outstanding on a fully diluted
basis) have been validly authorized, issued and are fully paid and
nonassessable.
5. TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed
all tax returns and reports as required by law. These returns and reports are
true and correct in all material respects. The Company has paid all taxes and
other material assessments due. The provision for taxes of the Company shown on
the Company's financial statements is adequate for taxes due or accrued as of
the date thereof. The Company has not elected pursuant to the Internal Revenue
Code of 1986, as amended ("CODE"), to be treated as an S corporation, nor has it
<PAGE>
made any other elections pursuant to the Code (other than elections which relate
solely to methods of accounting, depreciation or amortization) which would have
a material adverse affect on the Company, its financial condition, its business
as presently conducted or proposed to be conducted or any of its material
properties or material assets. The Company has never had a corporate, income or
payroll tax deficiency or audit and the Company has made all withholdings for
all income tax of its employees.
6. LEASES. The Company has not received written notice that
the Company is in default under any leases under which the Company is a lessee
(the "LEASES"), except as set forth on EXHIBIT C attached hereto and, to the
Company's best knowledge, there is no event which, with the giving of notice or
the passage of time, or both, will constitute a default by the Company under any
other material terms, covenants or conditions of any Lease. There is no
litigation pending against the Company by the Landlord under any Lease seeking
to terminate or otherwise disturb the Company's peaceful possession of the
premises demised under such Lease to the extent possession of the premises so
demised has been delivered to, and accepted by the Company pursuant to the terms
of the applicable Lease. Assuming the due authorization, execution and delivery
of any Leases to which the Company is a party by parties other than the Company,
such leases constitute legal, valid and binding obligations of such respective
parties thereto, in accordance with the material terms, covenants and conditions
of the respective Leases, as such terms, covenants and conditions may be
interpreted pursuant to applicable law and equitable principles.
7. LITIGATION. There are no actions, suits, proceedings or
investigations ("ACTIONS") pending (or, to the best of the Company's knowledge,
any basis therefor or threat thereof) against the Company, which, either in any
case or in the aggregate, might have a material adverse affect on the business,
operations, properties or condition (financial or otherwise) of the Company,
which might result in any material impairment of the right or ability of the
Company to carry on its business as now conducted or proposed to be conducted,
and none which questions the validity of this Agreement or any action taken or
to be taken in connection herewith. There is no Action by the Company currently
pending or which the Company currently intends to initiate. All existing Actions
against the Company are set forth on EXHIBIT D attached hereto.
8. PERMITS AND LICENSES. The Company has obtained or is in the
process of obtaining all franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by it (the
"Permits"), the lack of any would materially and adversely affect the business,
properties, prospects or financial condition of the Company. The Company is not
in default in any material respect under any of such existing Permits.
9. INSURANCE. The Company has insurance policies in amounts
customary for companies similarly situated, which, in the Company's belief, is
adequate to protect the Company and its financial condition against the risks
involved in the business conducted and proposed to be conducted by the Company.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS. As a
material inducement to the Company to enter into this Agreement and sell the
Preferred Stock and issue the Warrants to the Investors, each Investor,
severally and not jointly, hereby represents and warrants to the Company as
follows with respect to itself only:
1. CAPACITY AND POWER. The Investor has full capacity, power
and authority to execute and deliver this Agreement, to perform its obligations
under this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly executed and delivered by the Investor and
constitutes a valid and binding agreement, enforceable against it in accordance
with its terms, subject to applicable bankruptcy, insolvency and other similar
laws affecting the enforceability of creditors' rights generally, general
equitable principles and the discretion of courts in granting equitable
remedies.
<PAGE>
2. NO CONFLICT. The execution, delivery and performance by the
Investor of this Agreement and the transactions contemplated hereby and the
fulfillment by it of and compliance by it with the terms and conditions of this
Agreement do not and will not, violate or conflict with any terms or provisions
of (i) any contract, deed, lease or other agreement to which it is a party or to
which any of its assets are subject or (ii) any judgment, decree, order,
statute, rule or regulation applicable to, it or any of its assets, except for
such violations which could not reasonably be expected to materially impair or
delay its ability to consummate the transactions contemplated hereby. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any government agency or public or regulatory unit, agency, body or
authority with respect to it is required in connection with its execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby other than any of the foregoing, the failure of
which to receive or make, as the case may be, could not reasonably be expected
to materially impair or delay its ability to consummate the transactions
contemplated hereby.
3. INVESTMENT. The Investor (a) understands that the Preferred
Stock and the Warrants have not been, and will not be, registered under the
Securities Act, or under any state securities laws, and are being offered and
sold in reliance upon federal and state exemptions for transactions not
involving any public offering, (b) is acquiring the Preferred Stock and the
Warrants solely for its own account for investment purposes, and not with a view
to the distribution thereof, (c) is a sophisticated investor with knowledge and
experience in business and financial matters, (d) has received certain
information concerning the Company and has had the opportunity to obtain
additional information as desired in order to evaluate the merits and the risks
inherent in holding the Preferred Stock and the Warrants, (e) is able to bear
the economic risk and lack of liquidity inherent in holding the Preferred Stock
and the Warrants, and (f) is an Accredited Investor.
6. CLOSING FEES. As a material inducement to the Investors to
enter into this agreement and purchase the Preferred Stock and receive the
Warrants, the Company agrees to pay to the Investors on the Closing Date (i)
reasonable attorneys' fees and out-of-pocket expenses of legal counsel to the
Investors, and (ii) a closing fee of $41,666.00 in the aggregate.
7. CONDITIONS TO CLOSING. The obligations of each of the
Investors to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions, any and all of which may be waived in whole or in part by the
Investors to the extent permitted by applicable law:
(a) CLOSING DELIVERIES. The Company shall have delivered to
each of the Investors the following closing documents in form and substance
reasonably acceptable to its counsel:
(i) a certificate of the Secretary of the Company,
dated the Closing Date, as to the incumbency of any officer of the Company,
executing this Agreement or any document related thereto and covering such other
matters as the Investors may reasonably request;
(ii) certified copies of the resolutions of the
Company's Board of Directors authorizing the execution, delivery and
consummation of this Agreement and the transactions contemplated hereunder;
(iii) a good standing certificate with respect to the
Company, together with certified charter documents of the Company from the
Secretary of State of the Company's jurisdiction of incorporation, together with
certified copies of the bylaws of the Company;
<PAGE>
(iv) certificates evidencing the Preferred Stock and
the Warrants;
(v) executed copies of (A) this Agreement, (B) the
Warrant Agreement, dated as of the date hereof, by and among the Company and
each of the Investors, (C) executed certificates evidencing the Warrants, (D)
the Amended Registration Rights Agreement, and (E) the Shareholders Agreement;
and;
(vi) an opinion of Kirkland & Ellis, counsel to
the Company, dated as of the date hereof, in form and substance reasonably
acceptable to counsel for the Investors.
8. MISCELLANEOUS.
1. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
2. ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Agreement, the Shareholders Agreement, the Registration Rights
Agreement, the Amended Registration Rights Agreement, and the Warrant Agreement
embody the complete agreement and understanding among the parties hereto with
respect to the subject matter hereof and supersede and preempt any prior
understandings, agreements or representations by or among the parties, written
or oral, which may have related to the subject matter hereof in any way.
3. SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of and be enforceable by the parties hereto and their respective
successors and permitted assigns. No party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other. Notwithstanding anything herein to the contrary, each of
the Investors may, in the ordinary course of its business and in accordance with
applicable law, at any time assign to an Affiliate of such Person or to one or
more banks or other financial institutions or entities which are not then in
direct competition with the Company, all or any part of its rights and
obligations under this Agreement; PROVIDED, that each of the Investors may make
any such assignment only if it is required to do so pursuant to its limited
partnership agreement or in connection with any dissolution of such Person
pursuant to its limited partnership agreement.
4. COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
5. REMEDIES. The Company acknowledges that the Preferred Stock
and Warrants are unique and recognizes and affirms that in the event of a breach
of this Agreement by the Company or any of the Investors, money damages may be
inadequate and the Investor, or the Company, as the case may be, may have no
adequate remedy at law. Accordingly, the Company and each of the Investors
agrees that such Investor or the Company, as the case may be, shall have the
right, in addition to any other rights and remedies existing in its favor at law
or in equity, to enforce its rights and the obligations of the Company or such
Investor (as the case may be) hereunder not only by an action or actions for
damages but also by an action or actions for specific performance, injunctive
and/or other equitable relief (without posting of bond or other security).
6. NOTICES. All notices, demands, or other communications to
be given or delivered under or by reason of the provision of this Agreement will
be in writing and will be deemed given when delivered personally, mailed by
certified or registered mail, return receipt requested, postage prepaid, or sent
via nationally
<PAGE>
recognized overnight courier, or sent via facsimile to the recipient. Such
notices, demands and other communications will be sent to the address indicated
below:
If to the Company, to:
Town Sports International, Inc.
888 Seventh Avenue, 25th Floor
New York, New York 10106
Attention: Alex Alimanestianu
Facsimile No.: (212) 246-8422
with copies (which shall not constitute notice to the
Company) to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900
AND
Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799
If to the Farallon Investors, to:
Farallon Capital Management, LLC
One Maritime Plaza
Suite 1325
San Francisco, California 94111
Attention: Jason Fish and Mark Wehrly
Facsimile No.: (415) 421-2133
with a copy (which shall not constitute notice to the
Farallon Investors), to:
Richards Spears Kibbe & Orbe
One Chase Manhattan Plaza
57th Floor
New York, New York 10005
Attention: William Q. Orbe
Facsimile No.: (212) 530-1801
<PAGE>
To the Rosewood Investor:
Rosewood Capital Partners, L.P.
One Maritime Plaza
Suite 1330
San Francisco, California 94111
Attention: Kyle A. Anderson
Facsimile No.: (415) 362-1192
with a copy (which shall not constitute notice to
Rosewood), to:
Preston Gates & Ellis, LLP
One Maritime Plaza
Suite 2400
San Francisco, California 94111
Attention: Lawrence B. Low, Esq.
Facsimile No.: (415) 788-8819
or such other address or to the attention of such other Person as the recipient
party shall have specified by prior written notice to the sending party.
7. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
8. AMENDMENT AND WAIVER. The provisions of this Agreement may
be amended and waived only with the prior written consent of the parties. No
waiver by either party of any default, misrepresentation, or breach of warranty
or covenant hereunder, whether intentional or not, shall be deemed to extend to
any prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
9. TIME OF THE ESSENCE; COMPUTATION OF TIME. Time is of the
essence for each and every provision of this Agreement. Whenever the last day
for the exercise of any privilege or the discharge of any duty hereunder shall
fall upon a Saturday, Sunday, or any date on which banks in New York, New York
are authorized to be closed, the party having such privilege or duty may
exercise such privilege or discharge such duty on the next succeeding day which
is a regular business day.
10. WAIVER OF JURY TRIAL. Each of the parties hereto waives
any right it may have to trial by jury in respect of any litigation based on,
arising out of, under or in connection with this Agreement or any course of
conduct, course of dealing, verbal or written statement or action of any party
hereto.
11. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Stock Purchase
Agreement on the date first above written.
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ Richard Pyle
Name: Richard Pyle
Title: CFO
FARALLON CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By: /s/ Jason Fish
Name: Jason Fish
Title: Principal
FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By: /s/ Jason Fish
Name: Jason Fish
Title: Principal
FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By: /s/ Jason Fish
Name: Jason Fish
Title: Principal
<PAGE>
RR CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By: /s/ Jason Fish
Name: Jason Fish
Title: Principal
ROSEWOOD CAPITAL, L.P.
By: Rosewood Capital Associates, L.P.
Its: General Partner
By: /s/ Kyle A. Anderson
Name: Kyle A. Anderson
Title: Principal
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
INVESTOR PREFERRED STOCK WARRANTS PURCHASE PRICE
-------- --------------- -------- --------------
<S> <C> <C> <C>
Farallon Capital Partners, L.P. 7,000 25,070.67 $7,000,000.00
Farallon Capital Institutional Partners, L.P. 8,000 28,652.19 $8,000,000.00
Farallon Capital Institutional Partners II, L.P. 4,000 14,326.10 $4,000,000.00
RR Capital Partners, L.P. 1,000 3,581.52 $1,000,000.00
Rosewood Capital, L.P. 5,000 17,907.62 $5,000,000.00
--------- ----------- --------------
Total: 25,000 89,538.10 $25,000,000.00
</TABLE>
<PAGE>
SCHEDULE B
[CAPITALIZATION OF THE COMPANY]
<PAGE>
EXHIBIT A
[PREFERRED STOCK TERMS]
<PAGE>
EXHIBIT B
[FORM OF WARRANT]
<PAGE>
EXHIBIT C
With respect to the lease, dated as of July 15, 1998, by and between Capital
Plaza Associates, LLC, as landlord, and TSI Weymouth, Inc., as tenant,
concerning premises in the Capitol Plaza, 551-553 Washington Street, Weymouth,
Massachusetts, the landlord has claimed (but is not currently seeking
enforcement), and the Company grievously opposes, a breach of said lease as a
result of the nonpayment of certain additional rent (currently totaling
approximately $9,000). The Company has suspended payment of said additional rent
and claims that the lease term has not commenced as a result of a Declaration of
State of Water Supply Emergency issued August 20, 1998 by the Commonwealth of
Massachusetts Department of Environment Protection, which declaration has
prevented the tenant from obtaining building and other permits, and being able
to take occupancy of the premises.
<PAGE>
EXHIBIT D
RICHARD NOBLE ET AL. VS. TOWN SPORTS INTERNATIONAL, INC.
Plaintiffs allege breach of contract, unfair trade practices, unfair trade
competition, unjust enrichment, and a violation of their right to privacy, all
arising out of the Company's alleged unauthorized use of photographs taken by
the plaintiff-photographer of plaintiff-models in promotional advertising. The
plaintiffs seek an unspecified amount of damages, including the Company's
profits attributable to the photographs, exemplary damages, and attorney's fees.
The suit was originally filed in federal court on a claim of copyright
infringement on June 10, 1996. It was dismissed in February 1998 because
plaintiff had not registered copyrights to the photographs. It was refiled in
New York State Supreme Court on April 15, 1998. During the pendency of the
federal suit, the Company made an offer of judgment of $15,000, which offer was
rejected. No discovery has been conducted and, as a result, any assessment of
the outcome is preliminary. Based on the Company's preliminary assessment of the
case, however, a material adverse result appears remote.
The Company plans to contest this matter vigorously. No specific damage figure
is requested in the complaint. Some measure of damage is provided by the fact
that the photographs at issue were licensed to the Company for $4,000 for one
year from 1991-92. Plaintiffs seek compensation damages based in, INTER ALIA,
profits derived from photographs.
LAURA ABUNDEZ, FRANCISCA ALOCER, FELIPE AGUILAR VS. TOWN SPORTS
INTERNATIONAL, INC.
In these suits, plaintiffs filed complaints on February 3, 1994 with the State
of New York Division of Human Rights, charging discrimination of the basis of
national origin by dismissing or reducing work hours. In addition, complaints
were filed with the Equal Employment Opportunity Commission.
On January 5, 1995, the New York State Division of Human Rights found that there
was probable cause to believe that the respondent had, or was at the time of the
finding, engaged in the unlawful discriminatory practice complained of, and
recommended the matters for public hearing. No hearing has yet been scheduled.
The Company plans to contest these matters vigorously. Due to the variability of
the law on back pay and compensatory damage awards, and the absence of any
discovery to date, an estimate of the amount or range of potential loss in the
event of a finding of liability cannot be made at this time. A material adverse
result, however, appears remote, based upon the Company's assessment.
<PAGE>
Exhibit 10.6
AMENDED AND RESTATED SHAREHOLDERS AGREEMENT
-------------------------------------------
AMENDED AND RESTATED SHAREHOLDERS AGREEMENT ("AGREEMENT"),
dated as of November 13, 1998, by and among TOWN SPORTS INTERNATIONAL, INC., a
New York corporation (the "COMPANY"), BRUCKMANN, ROSSER, SHERRILL & CO., L.P., a
Delaware limited partnership ("BRS"), the individuals and entities listed on the
BRS Investor Signature Pages hereto (each, a "BRS INVESTOR", and collectively,
the "BRS INVESTORS"), FARALLON CAPITAL PARTNERS, L.P., a California limited
partnership ("FCP"), FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P., a California
limited partnership ("FCIP"), RR CAPITAL PARTNERS, L.P., a Delaware limited
partnership ("RRC"), and FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P., a
California limited partnership ("FII" and, together with FCP, FCIP, and RRC, the
"FARALLON INVESTORS", and individually, a "FARALLON INVESTOR"), CANTERBURY
DETROIT PARTNERS, L.P., a Delaware limited partnership ("CANTERBURY DETROIT"),
CANTERBURY MEZZANINE CAPITAL, L.P., a Delaware limited partnership ("CANTERBURY
MEZZANINE" and, together with Canterbury Detroit, "CANTERBURY"), ROSEWOOD
CAPITAL, L.P., a Delaware limited partnership ("ROSEWOOD"), and certain
shareholders of the Company listed on the Executive Signature Page hereto,
including those Persons who have executed joinders to the Original Shareholders
Agreement (each, an "EXECUTIVE", collectively, the "EXECUTIVES") (BRS, the BRS
Investors, Farallon, Canterbury Detroit, Canterbury Mezzanine, Rosewood and the
Executives are referred to collectively herein, together with each of their
respective Permitted Transferees (as defined herein), as the "SHAREHOLDERS").
Capitalized terms used herein but not otherwise defined shall have the meanings
assigned to such terms in Section 1.
WHEREAS, the parties hereto desire to amend and restate in its
entirety the Shareholders Agreement, dated as of December 10, 1996, by and among
the Company and certain other parties thereto (the "ORIGINAL SHAREHOLDERS
AGREEMENT") in accordance with its terms.
WHEREAS, BRS, the BRS Investors and the Farallon Investors
have acquired shares of the Company's Class A Common Stock, par value $.001 per
share (the "CLASS A COMMON"), and shares of the Company's Series A Preferred
Stock, par value $1.00 per share (the "SERIES A PREFERRED"), pursuant to Stock
Purchase Agreements, dated as of December 10, 1996, with the Company (in each
case, as the same may be amended, restated or modified from time to time, the
"INVESTOR AGREEMENTS").
WHEREAS, the Executives hold shares of the Company's Class A
Common pursuant to Executive Stock Agreements, with the Company (in each case,
as the same may be amended, restated or modified from time to time, the
"EXECUTIVE AGREEMENTS") and/or have been granted options to purchase shares of
the Class A Common, pursuant to Common Stock Option Agreements, by and between
the Company and each of the Executives (in each case, as the same may be
amended, restated or modified from time to time, the "COMMON OPTION
AGREEMENTS").
WHEREAS, certain of the Executives have acquired shares of the
Company's Series B Preferred Stock, par value $1.00 per share (the "SERIES B
PREFERRED"), pursuant to the Executive
<PAGE>
Agreements and/or have been granted options to purchase shares of the Series B
Preferred pursuant to Preferred Stock Option Agreements, dated as of December
10, 1996, by and between the Company and each such Executive (as the same may be
amended, restated or modified from time to time, the "PREFERRED OPTION
AGREEMENTS").
WHEREAS, Canterbury Mezzanine has acquired a warrant (together
with all warrants issued in substitution or replacement therefor, the "WARRANT")
exercisable for shares of Class A Common pursuant to the Warrant Agreement,
dated as of December 10, 1996, by and between Canterbury Mezzanine and the
Company (as the same may be amended, restated or modified from time to time, the
"MEZZANINE WARRANT AGREEMENT").
WHEREAS, each of Canterbury Mezzanine and Canterbury Detroit
has acquired shares of the Company=s Senior Preferred Stock, par value $1.00 per
share (the "SENIOR PREFERRED STOCK"), pursuant to the Stock Purchase Agreement,
dated as of the date hereof, by and among the Company, Canterbury Mezzanine and
Canterbury Detroit (as the same may be amended, restated or modified from time
to time, the "SENIOR PREFERRED STOCK PURCHASE AGREEMENT").
WHEREAS, Canterbury Detroit has acquired a warrant (together
with all warrants issued in substitution or replacement therefor, the "DETROIT
WARRANT") exercisable for shares of Class A Common, pursuant to the Warrant
Agreement, dated as of the date hereof, by and among the Company, Canterbury
Detroit and Canterbury Mezzanine (as the same may be amended, restated or
modified from time to time, the "SECOND WARRANT AGREEMENT").
WHEREAS, Canterbury Mezzanine has acquired a warrant (together
with all warrants issued in substitution or replacement therefor, the "MEZZANINE
WARRANT") exercisable for shares of Class A Common, pursuant to the Second
Warrant Agreement.
WHEREAS, (i) the Farallon Investors intend to acquire warrants
(together with all warrants issued in substitution or replacement therefor, the
"FARALLON WARRANT") exercisable for shares of Class A Common, and (ii) Rosewood
intends to acquire a warrant (together with all warrants issued in substitution
or replacement therefor, the "ROSEWOOD WARRANT") exercisable for shares of Class
A Common, in each case, pursuant to the Warrant Agreements to be entered into by
and among the Farallon Investors, Rosewood and the Company substantially in the
same form as the Second Warrant Agreement (as the same may be amended, restated
or modified from time to time, the "THIRD WARRANT AGREEMENTS").
WHEREAS, the Farallon Investors and Rosewood intend to acquire
shares of the Company's Senior Preferred Stock pursuant to the Second Senior
Preferred Stock Purchase Agreement to be entered into by and among the Company,
the Farallon Investors, and Rosewood substantially in the same form as the
Senior Preferred Stock Purchase Agreement (as the same may be amended, restated
or modified from time to time, the "SECOND SENIOR PREFERRED STOCK PURCHASE
AGREEMENT").
<PAGE>
WHEREAS, the Company and the Shareholders desire to enter into
this Agreement for the purposes, among others, of (i) establishing the
composition of the Company's Board of Directors (as in effect from time to time,
the "BOARD"), (ii) assuring continuity in the management and ownership of the
Company and (iii) limiting the manner and terms by which the Shareholder Shares
may be transferred.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Agreement
hereby agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have
the following meanings:
"AFFILIATE" shall mean, 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" (including,
with 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).
"APPROVED SALE" means the sale of the Company, in a single
transaction or a series of related transactions, to an Unaffiliated Third Party
(a) pursuant to which such Unaffiliated Third Party proposes to acquire all of
the outstanding Common Stock (whether by merger, consolidation,
recapitalization, reorganization, purchase of the outstanding Common Stock or
otherwise) or all or substantially all of the consolidated assets of the
Company, (b) which has been approved by the Board and holders of a majority of
the outstanding BRS Shares, voting together as a single class, and (c) pursuant
to which all holders of Shareholder Shares and Preferred Shares receive at the
same time (whether in such transaction or, with respect to an asset sale, upon a
subsequent liquidation) the same form and amount of consideration (x) per share
of Common Stock (as adjusted for any consideration payable by such holders in
connection with the exercise of any Shareholder Warrants or Options) with
respect to holders of Shareholder Shares, (y) per share of Preferred Stock
(which shall in no event be less than the Liquidation Value (plus accrued and
unpaid dividends) as adjusted for any consideration payable by, or special
accrual payable to, such holders in connection with the exercise of any
Preferred Options) with respect to holders of Preferred Shares (provided that in
any Approved Sale, the holders of Senior Preferred Stock shall receive at least
the full Liquidation Value (plus accrued and unpaid dividends) thereof, it being
understood and agreed that the Senior Preferred Stock is senior in priority to
the Preferred Stock and Common Stock in connection with an Approved Sale), or if
any holders of Shareholder Shares or Preferred Shares are given an option as to
the form and amount of consideration received, all such holders of Shareholder
Shares or Preferred Shares, as the case may be, are given the same option;
PROVIDED, that such consideration shall be deemed to include any other
consideration paid or payable by such Unaffiliated Third Party to any holder of
Stockholder Shares in connection with such transaction, or otherwise directly or
indirectly related to such transaction, which is not in exchange for or
attributable to securities of the Company held by such holder.
<PAGE>
"BRS SHARES" means Shareholder Shares owned by BRS and the BRS
Investors, or any of their respective Permitted Transferees.
"COMMON OPTIONS" means, collectively, the options to purchase
Class A Common granted to certain Executives pursuant to the Town Sports
International, Inc. Amended and Restated 1996 Stock Option Plan and the Common
Option Agreements.
"COMMON STOCK" means, collectively, the Class A Common, the
Class B Common, and any other class of common stock of the Company, or if such
outstanding Common Stock is hereafter changed into or exchanged for different
securities of the Company, such other securities.
"EXECUTIVE SHARES" means Shareholder Shares owned by the
Executives or any of their respective Permitted Transferees.
"FAMILY GROUP" means, with respect to an individual
Shareholder, (i) such Shareholder's spouse, former spouse and descendants
(whether natural or adopted), parents and their descendants, descendants of such
brothers and sisters and any spouse of the foregoing individuals or (ii) any
trust solely for the benefit of any of the individuals listed in clause (i)
above.
"FARALLON SHARES" means Shareholder Shares owned by the
Farallon Investors or their respective Permitted Transferees.
"INITIAL PUBLIC OFFERING" means the sale, in the initial
underwritten public offering registered under the Securities Act, of shares of
the Company's Common Stock where, after such offering, the Common Stock sold in
such offering is subject to being traded on the NASDAQ National Market or a
national securities exchange.
"INVESTORS" means, collectively, BRS and the Farallon
Investors.
"LIQUIDATION VALUE" means, with respect to any share of Senior
Preferred Stock or any share of any series of Preferred Stock, the "Liquidation
Value" for such shares or series as defined and determined in accordance with
the Company's Certificate of Incorporation, as in effect from time to time.
"OTHER SHAREHOLDERS" means, with respect to a Shareholder, all
Shareholders other than such Shareholder.
"OWNERSHIP RATIO" means, as to a Shareholder at the time of
determination, the percentage obtained by dividing the amount of shares of
Common Stock held by such Shareholder on a fully diluted basis at such time by
the aggregate amount of shares of Common Stock outstanding on a fully diluted
basis at such time.
"PERMITTED TRANSFEREES" has the meaning set forth in
Section 4(c).
<PAGE>
"PERSON" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization, any other entity or a
governmental entity (or any department, agency or political subdivision
thereof).
"PREFERRED OPTIONS" means, collectively, the options to
purchase Series B Preferred granted to certain Executives pursuant to the
Preferred Option Agreements.
"PREFERRED SHARES" means, (i) any Preferred Stock or Senior
Preferred Stock now held or hereafter acquired by the Shareholders, (ii) any
Preferred Stock issued or issuable upon exercise of the Preferred Options, and
(iii) any securities issued or issuable directly or indirectly with respect to
the securities described in clauses (i) and (ii) above by way of stock dividend,
stock split, or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization. As to any particular shares
constituting Preferred Shares, such shares will cease to be Preferred Shares
when they have been sold in an Approved Sale, transferred pursuant to Section
4(a) or 4(b) hereof, or upon the consummation of an Initial Public Offering. For
purposes of this Agreement, a Person will be deemed a holder of Preferred Shares
whenever such Person has the rights to acquire directly or indirectly such
Preferred Shares (upon conversion or exercise in connection with a transfer of
securities or otherwise, but disregarding any restrictions or limitations upon
the exercise of such right), whether or not such acquisition has actually been
effected.
"PREFERRED STOCK" means, collectively, the Series A Preferred,
the Series B Preferred and any other class of preferred stock of the Company, or
if such outstanding Preferred Stock is hereafter changed into or exchanged for
different securities of the Company, such other securities.
"PUBLIC SALE" means any sale of Shareholder Shares to the
public pursuant to an offering registered under the Securities Act or to the
public effected through a broker, dealer or market maker pursuant to the
provisions of Rule 144 under the Securities Act.
"ROSEWOOD SHARES" means Shareholder Shares owned by Rosewood
or any of its Permitted Transferees.
"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time.
"SHAREHOLDER SHARES"means (i) any Common Stock now held or
hereafter acquired by the Shareholders, including upon conversion of any shares
of Senior Preferred Stock, (ii) any Common Stock issued or issuable upon
exercise of any Shareholder Warrants, (iii) Common Stock issued or issuable upon
exercise of the Common Options, and (iv) any equity securities issued or
issuable directly or indirectly with respect to the securities referred to in
clauses (i), (ii), and (iii) above by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger, consolidation
or other reorganization. As to any particular shares constituting Shareholder
Shares, such shares will cease to be Shareholder Shares when they have been sold
or acquired in a Public Sale or in an Approved Sale, transferred pursuant to
Section 4(a) or 4(b) hereof or upon the consummation of an Initial Public
Offering. For purposes of this Agreement, a Person will be deemed to be a holder
of Shareholder Shares whenever such Person has
<PAGE>
the right to acquire directly or indirectly such Shareholder Shares (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected.
"SHAREHOLDER WARRANTS" means the Warrant, the Mezzanine
Warrant, the Detroit Warrant, the Farallon Warrant (when and if issued), and the
Rosewood Warrant (when and if issued).
"SUBSIDIARY" means, with respect to any Person, any
corporation, partnership, association or other business entity of which (i) if a
corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by that Person or one or more of the other Subsidiaries
of that Person or a combination thereof, or (ii) if a partnership, association
or other business entity, a majority of the partnership or other similar
ownership interest thereof is at the time owned or controlled, directly or
indirectly, by any Person or one or more Subsidiaries of that Person or a
combination thereof. For purposes hereof, a Person or Persons shall be deemed to
have a majority ownership interest in a partnership, association or other
business entity if such Person or Persons shall be allocated a majority of
partnership, association or other business entity gains or losses or shall be or
control the managing director or a general partner of such partnership,
association or other business entity.
"TRANSACTION DOCUMENTS" means, collectively, (i) this
Agreement, (ii) the Registration Rights Agreement, dated as of December 10,
1996, by and among the parties hereto, (iii) the First Amendment to Registration
Rights Agreement, dated as of the date hereof, by and among the Company and
certain shareholders of the Company (iv) the Senior Preferred Stock Purchase
Agreement, (v) the Investor Agreements, (vi) the Warrant Documents, (vii) the
Second Senior Preferred Stock Purchase Agreement (when and if executed and
delivered by the parties thereto), (viii) the Executive Agreements, (ix) the
Common Option Agreements, (x) the Preferred Option Agreements and (xi) the
Professional Services Agreement, dated as of December 10, 1996, by and among the
Company and an Affiliate of BRS, in each case, as the same may be amended,
restated or modified from time to time.
"UNAFFILIATED THIRD PARTY" means any Person who, immediately
prior to the contemplated transaction (i) does not own in excess of 5% of the
Common Stock on a fully diluted basis (a "5% OWNER"), (ii) is not controlling,
controlled by or under common control with any such 5% Owner and (iii) is not
the spouse or descendent (by birth or adoption) of any such 5% Owner or a trust
for the benefit of such 5% Owner and/or such other Persons.
"WARRANT DOCUMENTS" means the Mezzanine Warrant Agreement, the
First Amendment to Warrant Agreement, dated as of the date hereof, by and among
the Company and Canterbury Mezzanine, the Second Warrant Agreement, and the
Third Warrant Agreements (when and if executed and delivered by the parties
thereto).
<PAGE>
"WARRANT HOLDERS" means Canterbury Mezzanine, Canterbury
Detroit, the Farallon Investors, Rosewood (when and if Rosewood receives the
Rosewood Warrant), and any other Shareholder to whom the Company issues
Shareholder Warrants after the date hereof.
2. BOARD OF DIRECTORS.
(a) Until the provisions of this Section 2 cease to be
effective, to the extent permitted by law, each Shareholder shall vote all
voting securities of the Company over which such Shareholder has voting control,
and shall take all other necessary or desirable actions within such
Shareholder's control (whether in such Shareholder's capacity as a Shareholder,
director, member of a board committee or officer of the Company or otherwise,
and including, without limitation, attendance at meetings in Person or by proxy
for purposes of obtaining a quorum and execution of written consents in lieu of
meetings), and the Company shall take all necessary and desirable actions within
its control (including, without limitation, calling special board and
Shareholder meetings), so that:
(i) the authorized number of directors on the Board shall be
established at six directors;
(ii) the following Persons shall be elected to the Board:
(A) for so long as BRS holds at least 10% of the
Shareholder Shares held by it as of the date hereof, two (2)
representatives designated by BRS determined by a vote or
consent of the holders of a majority of the BRS Shares (the
"BRS DIRECTORS");
(B) Mark Smith, for so long as he is then acting and
duly elected Chief Executive Officer of the Company and
willing and capable to serve as a director, and after such
time, one individual determined by the vote or consent of
Shareholders owning a majority of the Executive Shares, voting
together as a single class (the "EXECUTIVE DIRECTOR");
(C) for so long as the Farallon Investors hold, in
the aggregate, at least 10% of the aggregate number of
Shareholder Shares held by them as of the date hereof, one (1)
representative designated by the Farallon Investors determined
by a vote or consent of the holders of a majority of the
Farallon Shares (the "FARALLON DIRECTOR"); and
(D) two (2) representatives designated by the holders
of the Class A Common, determined by the vote or consent of
the holders of a majority of the Class A Common, who shall
initially be Paul N. Arnold and Keith Alessi (each, an
"INDEPENDENT DIRECTOR").
<PAGE>
(iii) the composition of the board of directors of each of the
Company's Subsidiaries (a "SUB BOARD") shall be as determined by the
Board;
(iv) the Board shall create a Compensation Committee, which
shall consist of two BRS Directors and the Executive Director, which
shall have the duties and functions set forth in the Company's by-laws;
(v) any committees of the Board or a Sub Board (other than the
Compensation Committee) shall be created only upon the approval of a
majority of the members of the Board and the composition of each such
committee (if any) shall consist of at least one BRS Director;
(vi) any BRS Director, Executive Director, Farallon Director
or Independent Director shall be removed from the Board, a Sub Board or
any committee thereof (with or without cause) at the written request of
the Shareholder or Shareholders which have the right to designate such
director hereunder, but only upon such written request and under no
other circumstances (in each case, determined on the basis of a vote or
consent of the Shareholders referred to in clause (ii)(A), (ii)(B),
(ii)(C) or (ii)(D) as the case may be);
(vii) in the event that any representative designated
hereunder for any reason ceases to serve as a member of the Board or a
Sub Board or any committee thereof during such representative's term of
office, the resulting vacancy on the Board or such Sub Board or
committee shall be filled by a representative designated by the
Shareholders referred to in clause (ii)(A), (ii)(B), (ii)(C), or
(ii)(D), as the case may be; and
(b) The Company shall pay the reasonable out-of-pocket
expenses incurred by each director or observer in connection with attending the
meetings of the Board or any Sub Board and any committee thereof. In addition,
the Company shall pay such additional compensation to directors who are not
employees of the Company or any of its Subsidiaries as the Board so determines.
(c) The provisions of this Section 2 shall terminate
automatically and be of no further force and effect upon the consummation of an
Initial Public Offering.
(d) If any party fails to designate a representative to fill a
directorship pursuant to the terms of this Section 2, the election of a Person
to such directorship shall be accomplished in accordance with the Company's
bylaws and applicable law (provided that such party may subsequently remove and
replace such Person). In the event that any provision of the Company's bylaws or
articles of incorporation is inconsistent with any provision of this Section 2,
the Shareholders shall take such action as may be necessary to amend any such
provision in the Company's bylaws or certificate of incorporation to remedy such
inconsistency.
(e) The Company shall give (i) each of Robert Giardina,
Alexander Alimanestianu, and Richard Pyle (all of whom are Executives, each, an
"OBSERVER") (for so long as each such Observer owns at least 10% of the
Stockholder Shares held by him as of the date
<PAGE>
hereof) and (ii) Canterbury Mezzanine and Canterbury Detroit (so long as each of
Canterbury Mezzanine and Canterbury Detroit holds any Preferred Shares or
Warrants) written notice of each meeting of the Board, at the same time and in
the same manner as notice is given to the directors, and the Company shall
permit each Observer and a representative of Canterbury Mezzanine and Canterbury
Detroit, taken as a group, to attend, as an observer, all such meetings unless
attendance at such meeting, in the Board's reasonable judgment, would create a
conflict of interest for such representative or Observer; PROVIDED, that in the
case of telephonic meetings, such representative or Observer need receive only
actual notice thereof at the same time and in the same manner as notice is given
to the directors, and such representative or Observer shall be given the
opportunity to listen to such telephonic meetings. The representative of
Canterbury Mezzanine and Canterbury Detroit and each Observer shall be entitled
to receive all written materials and other information (including, without
limitation, copies of meeting minutes) given to directors of the Company in
connection with such meetings at the same time such materials and information
are given to such directors unless, in the Board's reasonable judgment, receipt
of such materials would create a conflict of interest by such representative or
Observer. The Company shall give written notice of any action by written consent
in lieu of a meeting of directors to such representative or Observer prior to
the effective date of such consent describing in reasonable detail the nature
and substance of such action.
3 REPRESENTATIONS AND WARRANTIES. Each Shareholder represents
and warrants that (a) effective as of the date hereof such Shareholder is the
record owner of the number of Shareholder Shares and Preferred Shares set forth
opposite its name on SCHEDULE A attached hereto (assuming all such shares and
options therefor have become fully vested), (b) this Agreement has been duly
authorized, executed and delivered by such Shareholder and constitutes the valid
and binding obligation of such Shareholder, enforceable in accordance with its
terms, and (c) such Shareholder has not granted and is not a party to any proxy,
voting trust or other agreement which is inconsistent with, conflicts with or
violates any provision of this Agreement. No holder of Shareholder Shares shall
grant any such proxy or become party to any such voting trust or other agreement
which is inconsistent with, conflicts with or violates any provision of this
Agreement.
4 RESTRICTIONS ON TRANSFER.
(a) TAG ALONG RIGHTS. Subject to Sections 4(c) and 4(d) and
other than in connection with a Public Sale or Approved Sale, at least 30 days
prior to any sale, transfer, assignment, pledge or other disposal (a "TRANSFER")
of Shareholder Shares or Preferred Shares by BRS, BRS shall deliver a written
notice (the "SALE NOTICE") to the Company and the Other Shareholders, specifying
in reasonable detail the identity of the prospective transferee(s) and the terms
and conditions of the Transfer. The Other Shareholders may elect to participate
in the contemplated Transfer by delivering written notice to BRS within 15 days
after delivery of the Sale Notice. If any Other Shareholders have elected to
participate in such Transfer, BRS and such Other Shareholders shall be entitled
to sell in the contemplated Transfer, at the same price (provided that the price
of any share of Series B Preferred or Senior Preferred Stock Transferred by any
such Shareholder pursuant to this Section 4(a) shall equal 35% and 1,000%,
respectively, of the price of any share of Series A Preferred specified in the
Sale Notice) and on the same terms:
<PAGE>
(x), with respect to Shareholder Shares, a number of
Shareholder Shares equal to the product of (i) the quotient determined by
dividing the number of Shareholder Shares owned by such Person by the aggregate
number of Shareholder Shares owned by all Shareholders participating in such
Transfer and (ii) the aggregate number of Shareholder Shares to be sold in the
contemplated Transfer;
(y), (A) with respect to shares of Series A Preferred to be so
transferred by all such Shareholders, a number of shares of Series A Preferred
equal to the product of (i) the quotient determined by dividing (1) the number
of shares of Series A Preferred owned by such Person by (2) the sum of the
aggregate number of shares of Series A Preferred plus .35 times the number of
shares of Series B Preferred plus ten times the number of shares of Senior
Preferred Stock (the "PREFERRED BASE AMOUNT"), in each case owned by all
Shareholders participating in such Transfer and (ii) the aggregate number of
Preferred Shares to be sold in the contemplated Transfer;
(B) with respect to shares of Series B Preferred, a number of
shares of Series B Preferred to be so Transferred by all such Shareholders if
such Shareholders do not hold any share of Series A Preferred equal to the
product of (1) the quotient determined by dividing (A) the number of shares of
Series B Preferred owned by such Person by (2) the Preferred Base Amount and
(ii) the aggregate number of Preferred Shares to be sold in the contemplated
Transfer; and
(C) with respect to shares of Senior Preferred Stock to be so
transferred by all such Shareholders if such Shareholders so elect to Transfer
Senior Preferred Stock in lieu of, or in addition to, shares of Series A
Preferred, a number of shares of Senior Preferred Stock equal to the product of
(i) the quotient determined by dividing the number of shares of Senior Preferred
Stock owned by such Person by (B) the Preferred Base Amount, and (ii) the
aggregate number of Preferred Shares to be sold in the contemplated Transfer;
PROVIDED, that (1) if the Sale Notice includes a Transfer of both Shareholder
Shares and Preferred Shares (whether shares of Preferred Stock, Senior Preferred
Stock, or both) and any Other Shareholder elects to participate in such
Transfer, such Other Shareholder must sell the number of Preferred Shares
calculated in accordance with clause (y) (or if such Shareholder holds a lesser
number of Preferred Shares, all Preferred Shares held by such Shareholder) and
(2) it being understood that if holders of Series B Preferred and/or Senior
Preferred Stock participated in any Transfer of Preferred Shares as a result of
the formulae set forth in clause (y) above, the aggregate number of Preferred
Shares so Transferred will not equal the number of Preferred Shares specified in
the Sale Notice.
(b) FIRST OFFER RIGHTS.
(i) Subject to Sections 4(c) and 4(d) and other than
in connection with a Public Sale or Approved Sale, at least thirty (30) days
prior to any Transfer of Shareholder Shares by any Shareholder (other than
holders of BRS Shares, Farallon Shares, or Rosewood Shares), the Shareholder
making such Transfer (the "TRANSFERRING SHAREHOLDER") shall deliver a written
notice (the
<PAGE>
"TRANSFER NOTICE") to the Company and the Investors specifying in reasonable
detail the number of shares proposed to be transferred (the "TRANSFER Shares"),
the proposed purchase price and the other terms and conditions of the Transfer.
The Company may elect to purchase all (but not less than all) of the Transfer
Shares upon the same terms and conditions as those set forth in the Transfer
Notice, by delivering a written notice of such election to the Transferring
Shareholder within fifteen (15) days after the Transfer Notice has been
delivered to the Company. If the Company has not elected to purchase all of the
Transfer Shares, the Investors (or their designees) may elect to purchase all
(but not less than all) of the Transfer Shares, upon the same terms and
conditions as those set forth in the Transfer Notice, by giving written notice
of such election to the Transferring Shareholder within 15 days after the
Transfer Notice has been given to the Investors. If each of the Investors elects
to purchase the Transfer Shares, the Transfer Shares to be purchased by each
Investor shall be allocated among the Investors based upon the relative number
of Shareholder Shares then held by each such Investor unless otherwise agreed
upon by the Investors. If neither the Company nor the Investors elects to
purchase all of the Transfer Shares specified in the Transfer Notice, then the
Transferring Shareholder may transfer the Transfer Shares specified in the
Transfer Notice at a price and on terms in the aggregate not materially more
favorable to the transferee(s) thereof than specified in the Transfer Notice
during the 90-day period immediately following the date on which the Transfer
Notice has been given to the Company and the Investors. Any Transfer Shares not
transferred within such 90-day period will continue to be subject to the
provisions of this Section 4(b)(i) upon any subsequent proposed Transfer.
(ii) Subject to Sections 4(c) and 4(d) and other than
in connection with a Public Sale or Approved Sale, at least thirty (30) days
prior to Transfer of any Shareholder Shares by Rosewood or any Farallon
Investor, Rosewood or such Farallon Investor shall deliver written notice (any
such notice, the "FARALLON/ROSEWOOD SALE NOTICE") to BRS specifying in
reasonable detail the number of shares proposed to be transferred (the "PROPOSED
SHARES"). Upon receipt of the Farallon/Rosewood Sale Notice, BRS shall within
thirty (30) days deliver a written offer to Rosewood or such Farallon Investor,
as the case may be, to purchase the Proposed Shares specifying in reasonable
detail the amount and type of consideration to be offered for the Proposed
Shares and the other terms and conditions of such offer (the "BRS REPURCHASE
NOTICE"). Upon receipt of the BRS Repurchase Notice, Rosewood or such Farallon
Investor, as the case may be, shall within ten (10) days deliver to BRS a
written acceptance or rejection of the offer contained in the Repurchase Notice.
If Rosewood or such Farallon Investor, as the case may be, rejects the offer
contained in the BRS Repurchase Notice, Rosewood or such Farallon Investor, as
the case may be, may transfer the Proposed Shares specified in the applicable
Farallon/Rosewood Sale Notice at a price and on terms in the aggregate
materially not more favorable to the transferee(s) thereof than specified in the
BRS Repurchase Notice during the 90-day period immediately following the date on
which the Farallon Sale Notice has been given to BRS. Any Proposed Shares not
transferred within such 90-day period will continue to be subject to the
provisions of this Section 4(b)(ii) upon any subsequent proposed Transfer.
(iii) Any purchase by the Company and/or the
Investors pursuant to this Section 4(b) shall be closed at the Company's
executive offices within (x) 45 days after the Transfer Notice (in the case of
purchase pursuant to Section 4(b)(i)) or (y) 30 days after the acceptance by
<PAGE>
Rosewood or the applicable Farallon Investor, as the case may be, of the offer
set forth in the BRS Repurchase Notice pursuant to Section 4(b)(ii). At the
closing, the purchaser or purchasers shall pay the purchase price by certified
check or wire transfer of immediately available funds, and the seller or sellers
shall deliver the certificate or certificates (or duly executed affidavits of
lost certificates in accordance with the Certificate of Incorporation)
representing the Shareholder Shares and/or Preferred Shares, as the case may be,
to such purchaser or purchaser or their nominees, accompanied by duly executed
stock powers.
(c) PERMITTED TRANSFERS. The restrictions contained in this
Section 4 shall not apply with respect to any Transfer of Shareholder Shares (or
Preferred Shares, to the extent this Section 4 applies to Preferred Shares) by
any Shareholder (i) in the case of an individual Shareholder, pursuant to
applicable laws of descent and distribution or among such Shareholder's Family
Group, (ii) in the case of holders of the BRS Shares and its Permitted
Transferees, (A) among their Affiliates, partners and employees (provided that
in the case of a distribution to BRS' partners, such distribution shall be made
PRO RATA to all such partners in accordance with the terms of its agreement of
limited partnership), (B) to any employee, prospective employee, director or
prospective director of the Company or any Subsidiary of the Company as
incentive compensation, (C) to any former or prospective employee, director or
prospective director of BRS or any Affiliate of BRS or (D) to any BRS Investor
or BRS, (iii) in the case of Canterbury Detroit, Canterbury Mezzanine, Rosewood,
any Farallon Investor and their respective Permitted Transferees, (A) among
their respective Affiliates, members and partners (provided that in the case of
a distribution to Farallon's, Rosewood's, Canterbury Detroit's or Canterbury
Mezzanine's members or partners, such distribution shall be made PRO RATA to all
such partners in accordance with the terms of their respective agreements of
limited partnership) and (B) to any employee, director or prospective director
of the Company or any Subsidiary of the Company as incentive compensation, (iv)
in the case of each of Canterbury Mezzanine or Canterbury Detroit, in the
ordinary course of its business and in accordance with applicable law, to an
Affiliate of such Person or to one or more banks or other financial institutions
or entities which are not then in direct competition with the Company only if
either Canterbury Mezzanine or Canterbury Detroit is required to do so pursuant
to its agreement of limited partnership or in connection with any dissolution of
such Person pursuant to its agreement of limited partnership, or (v) in the case
of any Farallon Investor, to another Farallon Investor; PROVIDED, that the
rights and restrictions contained in this Section 4 shall continue to be
applicable to such Shareholder Shares or Preferred Shares, as the case may be,
after any such Transfer as if such Shareholder Shares or Preferred Shares, as
the case may be, were held by the transferor; and PROVIDED FURTHER, that the
transferees of such Shareholder Shares or Preferred Shares, as the case may be,
shall have agreed in writing to be bound by the provisions of this Agreement
which affect the Shareholder Shares or Preferred Shares, as the case may be, so
transferred by executing a joinder in substantially the form attached hereto as
EXHIBIT A. All transferees permitted under this Section 4(c) are collectively
referred to herein as "PERMITTED TRANSFEREES."
(d) TERMINATION OF RESTRICTIONS. The restrictions set forth
in this Section 4 shall continue with respect to each Shareholder Share or
Preferred Share until the earlier of (i) the Transfer of such Shareholder
Share or Preferred Share in a Public Sale or an Approved Sale, (ii) the
consummation of a an Initial Public Offering or (iii) the Transfer of such
Shareholder Share or
<PAGE>
Preferred Share (other than to another Shareholder or the Company) pursuant to
Section 4(a) or 4(b) hereof. In addition, the provisions of this Section 4 shall
terminate on the date on which BRS holds less than 10% of the Shareholder Shares
held by it as of the date hereof
5 SALE OF THE COMPANY.
(a) In the event of an Approved Sale, each Shareholder will
(i) consent to and raise no objections against the Approved Sale or the process
pursuant to which the Approved Sale was arranged, (ii) waive any dissenter's
rights and other similar rights, and (iii) if the Approved Sale is structured as
a sale of stock, each Shareholder will agree to sell its Shareholder Shares and
Preferred Shares on the terms and conditions of the Approved Sale. Each
Shareholder will take all reasonably necessary and desirable actions as directed
by the Board and the holders of a majority of the BRS Shares in connection with
the consummation of any Approved Sale, including, without limitation, executing
the applicable purchase agreements, which shall include customary and reasonable
representations, warranties, indemnities and contribution rights (provided that
any such indemnification or contribution obligations of any Shareholder shall be
limited to the total consideration received by such Shareholder in connection
with such Approved Sale).
(b) If the Company or the holders of the Company's securities
enter into any negotiation or transaction for which Rule 506 (or any similar
rule then in effect) under the Securities Act may be available with respect to
such negotiation or transaction (including a merger, consolidation or other
reorganization), the Other Shareholders (other than Canterbury Mezzanine,
Canterbury Detroit and Farallon, who shall act on their own behalf) will, at the
request of the Company, appoint a purchaser representative (as such term is
defined in Rule 501) reasonably acceptable to the Company. If any Other
Shareholder appoints a purchaser representative designated by the Company, the
Company will pay the fees of such purchaser representative, but if any Other
Shareholder declines to appoint the purchaser representative designated by the
Company such holder will appoint another purchaser representative (reasonably
acceptable to the Company), and such holder will be responsible for the fees of
the purchaser representative so appointed.
(c) All Shareholders will bear their PRO RATA share (based
upon the number of shares sold) of the reasonable costs of any sale of
Shareholder Shares and Preferred Shares pursuant to an Approved Sale to the
extent such costs are incurred for the benefit of all selling Shareholders and
are not otherwise paid by the Company or the acquiring party. Costs incurred by
any Shareholder on its own behalf will not be considered costs of the
transaction hereunder.
(d) This Section 5 shall automatically terminate upon the
earlier of (i) the consummation of a Initial Public Offering or (ii) the date on
which BRS hold less than 20% of the Common Stock on a fully diluted basis.
6 PREEMPTIVE RIGHTS. Except for issuances of Common Stock upon
exercise of any Shareholder Warrants or any Common Options or upon conversion of
the Preferred Stock or Senior Preferred Stock, if the Company issues any equity
securities or any securities containing options or rights to acquire any equity
securities or any securities convertible or exchangeable for
<PAGE>
equity securities in each case, after the date hereof to any Person (other than
the Executives or, the issuance of the Farallon Warrant and the Rosewood
Warrant) (the "OFFEREE"), the Company will offer to sell to each Shareholder, a
number of such securities ("OFFERED SHARES") so that the Ownership Ratio
immediately after the issuance of such securities for each Shareholder would be
equal to the Ownership Ratio for such Shareholder immediately prior to such
issuance of securities; PROVIDED, that if the antidilution provisions set forth
in Section 12 of any Warrant Document adjust the terms of such Warrant Document
as a result of such issuance, the Company shall not be required to offer the
applicable Warrant Holder the Offered Shares with respect to the Shareholder
Shares attributable to the applicable Shareholder Warrant. The Company shall
give each Shareholder at least 30 days prior written notice of any proposed
issuance, which notice shall disclose in reasonable detail the proposed terms
and conditions of such issuance (the "ISSUANCE NOTICE"). Each Shareholder will
be entitled to purchase such securities at the same price, on the same terms,
and at the same time as the securities are issued to the Offeree by delivery of
written notice to the Company of such election within 15 days after delivery of
the Issuance Notice (the "ELECTION NOTICE"); PROVIDED, that if more than one
type of security was issued, each Shareholder shall, if it exercises its rights
pursuant to this Section 6, purchase such securities in the same ratio as
issued. If any of the Shareholders have elected to purchase any Offered Shares,
the sale of such shares shall be consummated as soon as practical (but in any
event within 10 days) after the delivery of the Election Notice. In the event
any Shareholder elects not to exercise its rights pursuant to this Section 6, no
other Shareholder shall have the right to purchase the securities offered to
such Shareholder. This Section 6 will terminate automatically, and be of no
further force and effect, upon the consummation of a Initial Public Offering.
The parties hereto that were party to the Original Shareholders Agreement hereby
waive any and all rights to which such parties were entitled under Section 6 of
the Original Shareholders Agreement with respect to the issuance of the
Shareholder Warrants on the date hereof.
7 LEGEND. In addition to any legend required by any other
Transaction Document, each certificate evidencing Shareholder Shares or
Preferred Shares and each certificate issued in exchange for or upon the
transfer of any Shareholder Shares or Preferred Shares (if such shares remain
Shareholder Shares or Preferred Shares, as the case may be, as defined herein
after such transfer) shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE
ORIGINALLY ISSUED ON [DATE], AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES
REPRE-SENTED BY THIS CERTIFICATE ARE SUBJECT TO AN AMENDED AND
RESTATED SHAREHOLDERS AGREEMENT DATED AS OF NOVEMBER __, 1998
BY AND AMONG THE ISSUER OF SUCH SECURITIES (THE "COMPANY") AND
CERTAIN OF THE COMPANY'S SHAREHOLDERS. A COPY OF SUCH AMENDED
AND RESTATED SHAREHOLDERS AGREEMENT WILL BE FURNISHED WITHOUT
CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON WRITTEN
REQUEST."
<PAGE>
The Company shall imprint such legend on certificates evidencing Shareholder
Shares or Preferred Shares outstanding prior to the date hereof. The legend set
forth above shall be removed from the certificates evidencing any shares which
cease to be Shareholder Shares or Preferred Shares, as the case may be.
8 TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or
attempted Transfer of any Shareholder Shares in violation of any provision of
this Agreement shall be null and void, and the Company shall not record such
Transfer on its books or treat any purported transferee of such Shareholder
Shares as the owner of such shares for any purpose.
9 TRANSFER OF SHAREHOLDER SHARES.
(a) Shareholder Shares are transferable only pursuant to (i)
public offerings registered under the Securities Act, (ii) subject to the
provisions of Section 4 above, Rule 144, Rule 144A or Rule 701 (or any similar
rule or rules then in effect) of the Securities and Exchange Commission if such
rule is available, (iii) Section 4(c), and (iv) subject to Section 4 and Section
9(b) below, any other legally available means of Transfer.
(b) In connection with the Transfer of any Shareholder Shares
other than a Transfer described in clause (i) or (ii) of Section 9(a) above, the
holder thereof shall deliver written notice to the Company describing in
reasonable detail the Transfer or proposed Transfer, together with an opinion of
counsel reasonably acceptable to the Company to the effect that such Transfer of
Shareholder Shares may be effected without registration of such Shareholder
Shares under the Securities Act. In addition, if the holder of the Shareholder
Shares delivers to the Company an opinion of counsel that no subsequent Transfer
of such Shareholder Shares shall require registration under the Securities Act,
the Company shall promptly upon such contemplated Transfer deliver new
certificates for such Shareholder Shares which do not bear the legend set forth
in Section 6 above. If the Company is not required to deliver new certificates
for such Shareholder Shares not bearing such legend, the holder thereof shall
not Transfer the same until the prospective transferee has confirmed to the
Company in writing its agreement to be bound by the conditions contained in this
Section 9 and Section 7 above.
(c) Upon the request of a holder of Shareholder Shares, the
Company shall promptly supply to such Person or its prospective transferees all
information regarding the Company required to be delivered in connection with a
Transfer pursuant to Rule 144A (or any similar rule or rules then in effect) of
the Securities and Exchange Commission.
(d) Upon the request of any holder of Shareholder Shares, the
Company shall remove the legend set forth in Section 7 above from the
certificates for such holder's Shareholder Shares (or the eligible portion
thereof); PROVIDED, that such Shareholder Shares have been either registered
under the Securities Act or are eligible for sale pursuant to Rule 144 (or any
similar rule or rules then in effect) of the Securities and Exchange Commission.
<PAGE>
10 AMENDMENT AND WAIVER. Except as otherwise provided herein,
no modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Shareholders unless such modification,
amendment or waiver is approved in writing by the Company or the holders of not
less than 70% of the Shareholder Shares, respectively; PROVIDED, that no such
amendment or action which materially adversely affects any one or more
Shareholder(s) (whether as holders of Shareholder Shares or Preferred Shares)
shall be effective against such Shareholder(s) without the prior written consent
of each such Shareholder. For avoidance of doubt, an amendment to add another
party to this Agreement is not an action which, in and of itself, affects any
Shareholder materially adversely. The failure of any party to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of such party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
11 AFFILIATE TRANSACTIONS. The Company will not, and will not
permit any of its Subsidiaries, to enter into any transaction or series of
transactions after the date hereof, whether or not in the ordinary course of
business with any Affiliate or 5% Owner (or any Affiliate of such 5% Owner);
PROVIDED, that the foregoing shall not apply to (i) the declaration and payment
of dividends approved by the Board, (ii) employment arrangements with any
Executive or employees of the Company entered into in the ordinary course of
business, (iii) any transactions expressly permitted or contemplated by any
Transaction Document, or (iv) any transaction consented to by not less than 70%
of the Shareholder Shares excluding for purposes of this clause (iv) Shareholder
Shares held by such Affiliate or 5% Owner).
12 MISCELLANEOUS.
(a) SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
(b) ENTIRE AGREEMENT. Except as otherwise expressly set forth
herein, this Agreement and the other Transaction Documents embody the complete
agreement and understanding among the parties hereto with respect to the subject
matter hereof and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
(c) SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall bind and inure to the benefit of and be enforceable
by the Company and its successors and assigns and the Shareholders and any
subsequent holders of Shareholder Shares and the respective successors and
assigns of each of them, so long as they hold Shareholder Shares; it being
understood that any transferee of Shareholder Shares or Preferred Shares
pursuant to Section
<PAGE>
4(a) or 4(b) (other than Shareholders) shall not succeed to the rights or
obligations of the transferor hereunder.
(d) COUNTERPARTS. This Agreement may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
(e) REMEDIES. The parties hereto shall be entitled to enforce
their rights under this Agreement specifically to recover damages by reason of
any breach of any provision of this Agreement and to exercise all other rights
existing in their favor. The parties hereto agree and acknowledge that money
damages may not be an adequate remedy for any breach of the provisions of this
Agreement and that the Company, BRS, the BRS Investors, Farallon, Rosewood,
Canterbury Detroit, Canterbury Mezzanine, and any Executive may in its sole
discretion apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive relief (without posting a bond or other
security) in order to enforce or prevent any violation of the provisions of this
Agreement.
(f) NOTICES. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
will be in writing and will be deemed to have been given when delivered
personally, mailed by certified or registered mail, return receipt requested and
postage prepaid, or sent via a nationally recognized overnight courier, or sent
via facsimile to the recipient. Such notices, demands and other communications
will be sent to the address indicated below:
To the Company:
Town Sports International, Inc.
888 Seventh Avenue, 25th Floor
New York, New York 10106
Attention: Alex Alimanestianu
Facsimile No.: (212) 246-8422
With copies to (which shall not constitute notice to
the Company):
Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900
<PAGE>
To BRS:
Bruckmann, Rosser, Sherrill & Co., Inc.
126 East 56th Street, 29th Floor
New York, New York 10022
Attention: Stephen Edwards
Facsimile No.: (212) 521-3799
With a copy to (which shall not constitute notice to
BRS):
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900
To Farallon:
Farallon Capital Management, L.L.C.
One Maritime Plaza, Suite 1325
San Francisco, California 94111
Attention: Jason M. Fish
Facsimile No.: (415) 421-2133
With a copy to (which shall not constitute notice to
Farallon):
Richards, Spears, Kibbe & Orbe
One Chase Manhattan Plaza, 57th Floor
New York, New York 10005
Attention: William Q. Orbe, Esq.
Facsimile No.: (212) 530-1801
To Rosewood:
Rosewood Capital Partners, L.P.
One Maritime Plaza
Suite 1330
San Francisco, California 94111
Attention: Kyle A. Anderson
Facsimile No.: (415) 362-1192
With a copy to (which shall not constitute notice to
Rosewood):
Preston Gates & Ellis, LLP
One Maritime Plaza
Suite 2400
San Francisco, California 94111
Attention: Lawrence B. Low, Esq.
<PAGE>
Facsimile No.: (415) 788-8819
To Canterbury Mezzanine:
Canterbury Mezzanine Capital, L.P.
600 Fifth Avenue, 23rd Floor
New York, New York 10020
Attention: Patrick N. W. Turner
Facsimile No.: (212) 332-1584
With a copy to (which shall not constitute notice to
Canterbury Mezzanine):
Cravath Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700
To Canterbury Detroit:
Canterbury Detroit Partners, L.P.
600 Fifth Avenue, 23rd Floor
New York, New York 10020
Attention: Patrick N. W. Turner
Facsimile No.: (212) 332-1584
With a copy to (which shall not constitute notice to
Canterbury Detroit):
Cravath Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attention: Mayme Greer, Esq.
Facsimile No.: (212) 474-3700
To any of the Executives:
[EXECUTIVE'S NAME]
Town Sports International, Inc.
888 Seventh Avenue, Suite 1801
New York, New York 10106
Facsimile No.: (212) 246-8422
or such other address or to the attention of such other Person as the recipient
party shall have specified by prior written notice to the sending party.
<PAGE>
(g) WAIVER OF JURY TRIAL. Each of the parties hereto waives
any right it may have to trial by jury in respect of any litigation based on,
arising out of, under or in connection with this agreement or any course of
conduct, course of dealing, verbal or written statement or action of any party
hereto.
(H) GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
(i) TIME IS OF THE ESSENCE; COMPUTATION OF TIME. Time is of
the essence for each and every provision of this Agreement. Whenever the last
day for the exercise of any privilege or the discharge of any duty hereunder
shall fall upon a Saturday, Sunday, or any date on which banks in New York, New
York are authorized to be closed, the party having such privilege or duty may
exercise such privilege or discharge such duty on the next succeeding day which
is a regular business day.
(j) DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(k) JOINDER BY ROSEWOOD. The parties to this Agreement
acknowledge and agree that Rosewood shall not have any rights, duties or
obligations under this Agreement unless and until Rosewood actually acquires
shares of Senior Preferred Stock or the Shareholder Warrants to be issued to it
pursuant to the terms and conditions of the Second Senior Preferred Stock
Purchase Agreement. Effective upon such issuance, Rosewood shall automatically
become bound by the terms and provisions of this Agreement as indicated herein.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
TOWN SPORTS INTERNATIONAL, INC.
By:___/S/ Richard Pyle
Name: Richard Pyle
Title: CFO
BRUCKMANN, ROSSER, SHERRILL & CO., L.P.
By: BRS Partners, Limited Partnership
Its: General Partner
By:___/S/ Stephen Edwards
Name: Stephen Edwards
Title: Principal
CANTERBURY DETROIT PARTNERS, L.P.
By: Canterbury Detroit, LLC
Its: General Partner
By:__/S/Nicholas Dunphy
Name: Nicholas Dunphy
Title: Member
CANTERBURY MEZZANINE CAPITAL, L.P.
By: Canterbury Capital, LLC
Its: General Partner
By:__/S/Nicholas Dunphy
Name: Nicholas Dunphy
Title: Member
<PAGE>
FARALLON CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:____/S/ Jason Fish
Name: Jason Fish
Title: Principal
FARALLON CAPITAL INSTITUTIONAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:___/S/ Jason Fish
Name: Jason Fish
Title: Principal
RR CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:___/S/ Jason Fish
Name: Jason Fish
Title: Principal
FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P.
By: Farallon Partners, L.L.C.
Its: General Partner
By:____/S/Jason Fish
Name: Jason Fish
Title: Principal
<PAGE>
ROSEWOOD CAPITAL, L.P.
By: Rosewood Capital Associates, L.P.,
its General Partner
By:__/S/ Kyle A. Anderson
Name: Kyle A. Anderson
Title: Principal
<PAGE>
EXECUTIVE SIGNATURE PAGE
/s/ Richard Pyle
- -------------------------------
Richard Pyle
/s/ Mark Smith
- -------------------------------
Mark Smith
/s/ Robert Giardina
- -------------------------------
Robert Giardina
/s/ Alexander Alimanestianu
- -------------------------------
Alexander Alimanestianu
<PAGE>
SCHEDULE A
----------
<PAGE>
EXHIBIT A
FORM OF JOINDER TO
SHAREHOLDERS AGREEMENT
THIS JOINDER to the Amended and Restated Shareholders
Agreement, dated as of November __, 1998 by and among Town Sports International,
Inc., a New York corporation (the "COMPANY"), and certain shareholders of the
Company (the "AGREEMENT"), is made and entered into as of _____________, ____ by
and between the Company and ____________ ("HOLDER"). Capitalized terms used
herein but not otherwise defined shall have the meanings set forth in the
Agreement.
WHEREAS, Holder has acquired certain shares of Common Stock
("HOLDER STOCK"), and the Agreement and the Company requires Holder, as a holder
of Common Stock, to become a party to the Agreement, and Holder agrees to do so
in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Joinder hereby
agree as follows:
1. AGREEMENT TO BE BOUND. Holder hereby agrees that upon
execution of this Joinder, it shall become a party to the Agreement and shall be
fully bound by, and subject to, all of the covenants, terms and conditions of
the Agreement as though an original party thereto and shall be deemed a
Shareholder [AND ______] for all purposes thereof. In addition, Holder hereby
agrees that all Common Stock held by Holder shall be deemed Shareholder Shares
for all purposes of the Agreement.
2. SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Joinder shall bind and inure to the benefit of and be enforceable
by the Company and its successors and assigns and Holder and any subsequent
holders of Holder Stock and the respective successors and assigns of each of
them, so long as they hold any shares of Holder Stock.
3. COUNTERPARTS. This Joinder may be executed in separate
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.
4. NOTICES. For purposes of Section 12(f) of the Agreement,
all notices, demands or other communications to the Holder shall be directed to:
[Name]
[Address]
[Facsimile Number]
<PAGE>
5. GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
VALIDITY AND INTERPRETATION OF THIS JOINDER SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ANY CHOICE OF LAW OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
STATE OF NEW YORK OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.
6. DESCRIPTIVE HEADINGS. The descriptive headings of this
Joinder are inserted for convenience only and do not constitute a part of this
Joinder.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Joinder as of the date first above written.
TOWN SPORTS INTERNATIONAL, INC.
By:
----------------------------
Name:
Title:
[HOLDER]
By:
----------------------------
<PAGE>
SUBSIDIARIES EXHIBIT 21.1
- ------------ ------- ----
<TABLE>
<CAPTION>
SUBSIDIARY FORM OWNER
- ---------- ---- -----
<S> <C> <C>
TSI Alexandria, LLC Corporation Town Sports International, Inc.
TSI 217 Broadway, Inc. Corporation Town Sports International, Inc
TSI Allston, Inc. Corporation Town Sports International, Inc
TSI Arthro Fitness Services, Inc. Corporation Town Sports International, Inc
TSI Battery Park, Inc. Corporation Town Sports International, Inc
TSI Bethesda, Inc. Corporation Town Sports International, Inc
TSI Broadway, Inc. Corporation Town Sports International, Inc
TSI Brooklyn Belt, Inc. Corporation Town Sports International, Inc
TSI Brunswick, Inc. Corporation Town Sports International, Inc
TSI Bulfinch, Inc. Corporation Town Sports International, Inc
TSI Cash Management, Inc. Corporation Town Sports International, Inc
TSI Centreville, Inc. Corporation Town Sports International, Inc
TSI Cobble Hill, Inc. Corporation Town Sports International, Inc
TSI Colonia, LLC Corporation TSI Holdings (NJ), Inc.
TSI Commack, Inc. Corporation Town Sports International, Inc
TSI Copley, Inc. Corporation Town Sports International, Inc
TSI Croton, Inc. Corporation Town Sports International, Inc
TSI Danbury, Inc. Corporation Town Sports International, Inc
TSI Dupont Circle, Inc. Corporation TSI Holdings (DC), Inc.
TSI Dupont II, Inc. Corporation TSI Holdings (DC), Inc.
TSI East 23, Inc. Corporation Town Sports International, Inc
TSI East 34, Inc. Corporation Town Sports International, Inc
TSI East 36, Inc. Corporation Town Sports International, Inc
TSI East 41, Inc. Corporation Town Sports International, Inc
TSI East 51, Inc. Corporation Town Sports International, Inc
TSI East 59, Inc. Corporation Town Sports International, Inc
TSI East 76, Inc. Corporation Town Sports International, Inc
TSI East 86, LLC Corporation Town Sports International, Inc
TSI East 91, Inc. Corporation Town Sports International, Inc
TSI East 94, Inc. Corporation Town Sports International, Inc
TSI East Meadow, Inc Corporation Town Sports International, Inc
TSI Fairfax, LLC Corporation TSI Holdings (VA), Inc.
TSI Fenway, Inc. Corporation Town Sports International, Inc
TSI Fifth Avenue, Inc. Corporation Town Sports International, Inc
TSI First Avenue, Inc. Corporation Town Sports International, Inc
TSI Forest Hills, Inc. Corporation Town Sports International, Inc
TSI Fort Lee, LLC Corporation TSI Holdings (NJ), Inc.
TSI Framingham, Inc. Corporation Town Sports International, Inc
TSI Franklin Park, LLC Corporation TSI Holdings (NJ), Inc.
TSI Freehold, Inc. Corporation Town Sports International, Inc
TSI Germantown, LLC Corporation TSI Holdings (MD), Inc.
TSI Glover, Inc. Corporation TSI Holdings (DC), Inc.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
TSI Great Neck, Inc. Corporation Town Sports International, Inc
TSI Greenwich Street, Inc. Corporation Town Sports International, Inc
TSI Herald, Inc. Corporation Town Sports International, Inc
TSI Hoboken, Inc. Corporation Town Sports International, Inc
TSI Holdings (CIP), Inc. Corporation Town Sports International, Inc
TSI Holdings (DC), Inc. Corporation Town Sports International, Inc
TSI Holdings (IP), Inc. Corporation Town Sports International, Inc
TSI Holdings (MD), Inc. Corporation Town Sports International, Inc
TSI Holdings (NJ), Inc. Corporation Town Sports International, Inc
TSI Holdings (PA), Inc. Corporation Town Sports International, Inc
TSI Holdings (VA), Inc. Corporation Town Sports International, Inc
TSI International, Inc. Corporation Town Sports International, Inc
TSI Larchmont, Inc. Corporation Town Sports International, Inc
TSI Lexington, Inc. Corporation Town Sports International, Inc
TSI Lincoln, Inc. Corporation Town Sports International, Inc
TSI M Street, Inc. Corporation TSI Holdings (DC), Inc.
TSI Madison, Inc. Corporation Town Sports International, Inc
TSI Mahwah, LLC Corporation TSI Holdings (NJ), Inc.
TSI Marlboro, Inc. Corporation Town Sports International, Inc
TSI Mamaroneck, Inc. Corporation Town Sports International, Inc
TSI Matawan, Inc. Corporation Town Sports International, Inc
TSI Merrifield, Inc. Corporation Town Sports International, Inc
TSI Nanuet, Inc. Corporation Town Sports International, Inc
TSI Norwalk, Inc. Corporation Town Sports International, Inc
TSI Oceanside, Inc. Corporation Town Sports International, Inc
TSI Old Bridge, Inc. Corporation Town Sports International, Inc
TSI Parsippany, LLC Corporation TSI Holdings (NJ), Inc.
TSI Plainsboro, LLC Corporation TSI Holdings (NJ), Inc.
TSI Princeton, LLC Corporation TSI Brunswick, Inc.
TSI Ramsey, Inc. Corporation Town Sports International, Inc
TSI Rittenhouse, LLC Corporation TSI Holdings (PA), Inc.
TSI Rockville, Inc. Corporation Town Sports International, Inc
TSI Rodin Place, Inc. Corporation Town Sports International, Inc
TSI Scarsdale, Inc. Corporation Town Sports International, Inc
TSI Seaport, Inc. Corporation Town Sports International, Inc
TSI Sheridan, Inc. Corporation Town Sports International, Inc
TSI Society Hill, Inc. Corporation Town Sports International, Inc
TSI Soho, Inc. Corporation Town Sports International, Inc
TSI Somerset, LLC Corporation TSI Holdings (NJ), Inc.
TSI Springfield, LLC Corporation TSI Holdings (NJ), Inc.
TSI Stamford Downtown, Inc. Corporation Town Sports International, Inc
TSI Stamford Post, Inc. Corporation Town Sports International, Inc
TSI Stamford Rinks, Inc. Corporation Town Sports International, Inc
TSI Staten Island, Inc. Corporation Town Sports International, Inc
TSI Sterling, LLC Corporation TSI Holdings (VA), Inc.
TSI Syosset, Inc. Corporation Town Sports International, Inc
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
TSI Wall Street, Inc. Corporation Town Sports International, Inc
TSI Washington, Inc. Corporation TSI Holdings (DC), Inc.
TSI West 125, Inc. Corporation Town Sports International, Inc
TSI West 14, Inc. Corporation Town Sports International, Inc
TSI West 23, Inc. Corporation Town Sports International, Inc
TSI West 38, Inc. Corporation Town Sports International, Inc
TSI West 52, Inc. Corporation Town Sports International, Inc
TSI West 73, Inc. Corporation Town Sports International, Inc
TSI West 76, Inc. Corporation Town Sports International, Inc
TSI West 80, Inc. Corporation Town Sports International, Inc
TSI West Caldwell, LLC Corporation TSI Holdings (NJ), Inc.
TSI Weymouth, Inc. Corporation Town Sports International, Inc
TSI White Plains, Inc. Corporation Town Sports International, Inc
TSI Whitestone, Inc. Corporation Town Sports International, Inc
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL BALANCE SHEET AT DECEMBER 31, 1998, THE CONSOLIDATED
STATEMENT OF OPERATIONS AND THE CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SEVEN MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,154
<SECURITIES> 0
<RECEIVABLES> 628
<ALLOWANCES> 0
<INVENTORY> 1,253
<CURRENT-ASSETS> 22,240
<PP&E> 104,082
<DEPRECIATION> (22,656)
<TOTAL-ASSETS> 157,416
<CURRENT-LIABILITIES> 21,762
<BONDS> 87,333
36,735
20,530
<COMMON> 1
<OTHER-SE> (22,864)
<TOTAL-LIABILITY-AND-EQUITY> 157,416
<SALES> 0
<TOTAL-REVENUES> 71,662
<CGS> 0
<TOTAL-COSTS> 67,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,279
<INCOME-PRETAX> (959)
<INCOME-TAX> (399)
<INCOME-CONTINUING> (560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (560)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
