<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition period from ________________ to
_________________________________________________________
COMMISSION FILE NUMBER 333-40907
TOWN SPORTS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-2749906
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(ADDRESS, ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANTS
PRINCIPAL EXECUTIVE OFFICE.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 1,014,023.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) PAGE
a) Condensed Consolidated Balance Sheets
as of December 31, 1998 and June 30, 1999................... 1
b) Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1998 and 1999... 2
c) Condensed Consolidated Statements of Cash Flow
for the six months ended June 30, 1998 and 1999............. 3
d) Notes to Condensed Consolidated Financial Statements........ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 5
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 10
Item 2. Changes in Securities...................................... 10
Item 3. Defaults upon Senior Securities............................ 10
Item 4. Submission of Matters to a Vote of Security Holders........ 10
Item 5. Other Information.......................................... 10
Item 6. Exhibits and Reports on Form 8-K........................... 10
SIGNATURES............................................................. 11
Exhibit Index.......................................................... 12
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999
ALL FIGURES $'000
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
--------- ---------
1998 1999
--------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 19,154 $ 40,828
Accounts receivable 628 421
Inventory 1,253 1,159
Prepaid expenses and other current assets 1,205 1,330
--------- ---------
Total current assets 22,240 43,738
--------- ---------
Fixed assets, net of accumulated depreciation of $22,656 and
$29,240 at December 31, 1998 and June 30, 1999, respectively 81,426 105,014
Intangible assets, net of accumulated amortization of $6,028 and
$9,239 at December 31, 1998 and June 30, 1999, respectively 37,064 40,234
Deferred tax asset 8,570 10,268
Deferred membership costs 7,005 8,840
Other assets 1,111 1,215
--------- ---------
Total assets $ 157,416 $ 209,309
========= =========
LIABILITIES and STOCKHOLDERS' DEFICIT:
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 2,191 $ 2,048
Accounts payable 3,711 2,682
Accrued expenses and corporate income taxes payable 6,367 11,094
Deferred revenue 9,493 12,957
--------- ---------
Total current liabilities 21,762 28,781
Long-term debt and capital lease obligations 87,333 128,061
Deferred lease liabilities 10,791 12,489
Deferred revenue 2,446 3,172
Other liabilities 682 1,265
--------- ---------
Total liabilities 123,014 173,768
Redeemable senior preferred stock, $1.00 par value; liquidation value of $40,488
and $42,931 at December 31, 1998 and June 30, 1999 respectively; authorized
100,000 shares, 40,000 shares issued and outstanding at December 31, 1998
and June 30, 1999 36,735 39,348
--------- ---------
Stockholders' deficit:
Series A preferred stock, $1.00 par value; at liquidation value; authorized
200,000 shares, 153,637 shares issued
and outstanding at December 31, 1998 and June 30, 1999 20,351 21,784
Series B preferred stock, $1.00 par value; at liquidation value;
authorized 200,000 shares, 3,857 and 3,855 issued and
outstanding at December 31, 1998, and June 30, 1999, respectively 179 191
Class A voting common stock, $0.001 par value; authorized
2,500,000 shares; 1,015,714 and 1,014,023 issued and outstanding at
December 31, 1998, and June 30, 1999, respectively 1 1
Paid-in capital 7,844 8,198
Unearned compensation (2,546) (2,076)
Accumulated deficit (28,162) (31,905)
--------- ---------
Total stockholders' deficit (2,333) (3,807)
--------- ---------
Total liabilities and stockholders' deficit $ 157,416 $ 209,309
========= =========
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
ALL FIGURES $'000
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
June 30 June 30
------- -------
1998 1999 1998 1999
-------- -------- -------- --------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Club operations $ 25,544 $ 38,049 $ 47,366 $ 73,597
Management fees and other 641 582 1,372 1,173
-------- -------- -------- --------
26,185 38,631 48,738 74,770
-------- -------- -------- --------
Operating expenses:
Payroll and related 10,468 15,402 19,290 29,192
Club operating 8,411 12,780 15,369 25,312
General and administrative 2,100 2,569 3,789 4,830
Depreciation and amortization 2,754 5,200 4,892 9,829
Compensation expense in connection
with options stock options 917 659 1,101 849
-------- -------- -------- --------
24,650 36,610 44,441 70,012
-------- -------- -------- --------
Operating Income 1,535 2,021 4,297 4,758
Interest expense 1,919 2,356 4,187 4,524
Interest income (271) (150) (770) (400)
-------- -------- -------- --------
Income (loss) before provision (benefit)
for corporate income taxes (113) (185) 880 634
Provision (benefit) for corporate income taxes (64) (76) 401 319
-------- -------- -------- --------
Net (loss) income (49) (109) 479 315
Accreted dividends on preferred stock (622) (1,955) (1,249) (3,888)
-------- -------- -------- --------
Net loss attributable to common stockholders
$ (671) $ (2,064) $ (770) $ (3,573)
======== ======== ======== ========
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
ALL FIGURES $'000
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30
-------
1998 1999
-------- --------
<S> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income $ 479 $ 315
-------- --------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,892 9,829
Compensation expense in connection with stock options 1,101 849
Noncash rental expense, net of noncash rental income 1,462 1,698
Share of net income in affiliated companies (31) (168)
Amortization of debt issuance costs 229 350
Change in certain working capital components 1,361 8,749
Increase in deferred tax asset (256) (1,698)
Increase in deferred membership costs (984) (1,835)
Other 24 44
-------- --------
Total adjustments 7,798 17,818
-------- --------
Net cash provided by operating activities 8,277 18,133
-------- --------
Cash flows from investing activities:
Capital expenditures, net of effects of acquired businesses (11,769) (29,565)
Acquisition of businesses (22,642) (2,025)
Intangible and other assets (696) (145)
Landlord contributions -- 586
-------- --------
Net cash used in investing activities (35,107) (31,149)
-------- --------
Cash Flows from Financing Activities:
Proceeds from borrowings, net of expenses of issuance -- 35,778
Repayments of borrowings (979) (1,064)
Repurchase of stock -- (24)
-------- --------
Net cash (used in) provided by financing activities (979) 34,690
-------- --------
Net (decrease) increase in cash and cash equivalents (27,809) 21,674
Cash and cash equivalents at beginning of period 39,660 19,154
-------- --------
Cash and cash equivalents at end of period $ 11,851 $ 40,828
======== ========
Summary of the change in certain working capital components, net of effects of
acquired businesses:
(Increase) decrease in accounts receivable ($ 146) $ 207
(Increase) decrease in inventory (5) 94
(Increase) decrease in prepaid expenses and other current assets (766) 43
Increase in accounts payable and accrued expenses 107 4,215
Increase in deferred revenue 2,171 4,190
-------- --------
Net changes in working capital $ 1,361 $ 8,749
======== ========
Supplemental disclosures of cash flow information:
Noncash investing activities:
Acquisition of fixed assets included in accounts payable $ 2,496 $ 1,424
Acquisition of equipment financed by sellers or lessors $ 3,032 $ 1,648
</TABLE>
See notes to the condensed consolidated financial statements.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 30, 1999
(UNAUDITED)
ALL FIGURES $'000
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). The condensed consolidated financial statements
should be read in conjunction with the Company's December 31, 1998 consolidated
financial statements and notes thereto, included on Form 10-K. The year-end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles. Certain information and footnote disclosures which are normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC rules and
regulations. The Company believes that the disclosures made are adequate to make
the information presented not misleading. The information reflects all
adjustments which, in the opinion of Management, are necessary for a fair
presentation of the financial position and results of operations for the interim
periods set forth herein. All such adjustments are of a normal and recurring
nature. The results for the three-and six-month periods ended June 30, 1999 are
not necessarily indicative of the results for the entire fiscal year ending
December 31, 1999.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
-------- --------
<S> <C> <C>
Series B 9 3/4% Senior Notes, due 2004 $ 85,000 $125,000
Notes payable for acquired businesses 3,739 3,748
Capital lease obligations 785 1,361
-------- --------
89,524 130,109
Less, Current portion due within
one year 2,191 2,048
-------- --------
Long-term portion $ 87,333 $128,061
======== ========
</TABLE>
In June 1999, the Company issued $40.0 million of Series B 9 3/4% Senior Notes
at a price of 98.75%, providing $39.5 million of proceeds to the Company before
expenses relating to the issuance. Expenses related to the issuance amounted to
approximately $3.7 million.
The Company has a line of credit, with its principle bank for direct borrowings
and letters of credit of up to $25.0 million. 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. There were no outstanding
borrowings against this line of credit as of June 30, 1999 and outstanding
letters of credit issued totaled $1.8 million. The unutilized portion of the
line of credit as of June 30, 1999, was $23.2 million. This line of credit
expires on October 15, 2002.
The line of credit contains various covenants including interest coverage (as
defined) and a leverage ratio as well as restrictions on the payment of
dividends.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are one of the two leading owners and operators of fitness clubs in
the Northeast and Mid-Atlantic regions of the United States. As of June 30,
1999, we operated 79 clubs that collectively served approximately 200,000
members. We develop clusters of clubs to serve densely populated major
metropolitan regions in which a high percentage of the population commutes to
work. We service such populations by clustering clubs near the highest
concentrations of our target members' areas of both employment and residence.
Our target member is college-educated, typically between the ages of 20 and 44
and earns an annual income of approximately $50,000.
Our goal is to develop the premier health club network in each of the
major metropolitan regions we enter. We believe that clustering clubs allows us
to achieve strategic operating advantages that enhance our ability to achieve
this goal. In entering new regions, we develop 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 June 30, 1999,
approximately half of our members participated in a membership plan that allows
unlimited access to all of our clubs for a higher membership fee.
We have executed this strategy successfully in the New York region
through the network of clubs we operate under our New York Sports Clubs
("NYSC") brand name. We are the largest fitness club operator in Manhattan
with 24 locations and operate a total of 62 clubs under the NYSC name within
a defined radius of New York City. We are in the process of more fully
developing clusters within a smaller radius surrounding Washington, DC under
our Washington Sports Clubs ("WSC") brand name and have begun establishing
similar clusters surrounding Boston and Philadelphia under our Boston Sports
Clubs ("BSC") and Philadelphia Sports Clubs ("PSC") brand names,
respectively. We employ localized brand names for our 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.
Our 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.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of revenue for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------- -------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Club operations 97.6% 98.5% 97.2% 98.4%
Management fees and other 2.4 1.5 2.8 1.6
------ ------ ------ ------
100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Payroll and related 40.0 39.8 39.6 39.0
Club operating 32.1 33.1 31.5 33.9
General and administrative 8.0 6.7 7.8 6.5
Depreciation and amortization 10.5 13.5 10.0 13.1
Compensation expense in connection with stock options 3.5 1.7 2.3 1.1
------ ------ ------ ------
94.1 94.8 91.2 93.6
------ ------ ------ ------
Operating income 5.9 5.2 8.8 6.4
Interest expense 7.3 6.1 8.6 6.1
Interest income (1.0) (0.4) (1.6) (0.5)
------ ------ ------ ------
Income (loss) before provision (benefit) for corporate
income taxes (0.4) (0.5) 1.8 0.8
Provision (benefit) for corporate income taxes (0.2) (0.2) 0.8 0.4
------ ------ ------ ------
Net (loss) income (0.2) (0.3) 1.0 0.4
Accreted dividends on preferred stock (2.4) (5.0) (2.6) (5.2)
------ ------ ------ ------
Net loss attributable to common stockholders (2.6)% (5.3)% (1.6)% (4.8)%
====== ====== ====== ======
</TABLE>
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased approximately $12.4 million, or 47.5%, to
$38.6 million during the quarter ended June 30, 1999 from $26.2 million in the
quarter ended June 30, 1998. This increase resulted primarily from the
continuing maturation of the 30 clubs opened or acquired during calendar 1998
(approximately $7.2 million) and the eleven clubs opened or acquired in the
first six months of 1999 (approximately $2.0 million). In addition, revenues
increased during the quarter at the clubs opened or acquired prior to calendar
1998 (approximately $3.6 million).
Operating Expenses. Operating expenses increased $12.0 million, or
48.5%, to $36.6 million in the quarter ended June 30, 1999, from $24.7 million
in the quarter ended June 30, 1998. The increase was primarily due to $10.3
million of direct expenses associated with clubs added in calendar 1998 and
1999.
Payroll and related increased by $4.9 million, or 47.1% to $15.4
million in the quarter ended June 30, 1999, from $10.5 million in the quarter
ended June 30, 1998. The increase was primarily due to the 57.0% increase in
total months of club operations to 218 in the quarter ended June 30, 1999 from
139 in the quarter ended June 30, 1998 and the related increases in headcount.
Club operating increased by $4.4 million or 51.9% to $12.8 million in
the quarter ended June 30, 1999, from $8.4 million in the quarter ended June 30,
1998. The increase was primarily due to a 57.0% increase in total months of club
operations to 218 in the quarter ended June 30, 1999 from 139 in the quarter
ended June 30, 1998.
General and administrative increased by $469,000, or 22.3% to $2.6
million in the quarter ended June 30, 1999, from $2.1 million, in the quarter
ended June 30, 1998. This increase is attributable to expenses associated with
our expansion, including the expansion of our corporate office, employee
recruitment expenses and increases in voice and data communication expenses. In
March 1999 we moved our membership billing processing center to a purpose-built
location separate from our corporate office.
Depreciation and amortization increased by $2.4 million, or 88.8% to
$5.2 million in the quarter ended June 30, 1999, from $2.8 million in the
quarter ended June 30, 1998. This increase is attributable primarily to a full
period of depreciation and amortization for fixed asset additions, acquisitions
or openings during the quarter ended June 30, 1998 and the increased fixed and
intangible assets arising out of new club acquisitions and openings subsequent
to June 30, 1998.
Compensation expense in connection with stock options decreased
$258,000 or 28.1% to $659,000 for the quarter ended June 30, 1999 from $917,000
in the quarter ended June 30, 1998. The decrease is principally due to less
stock options vesting in the three months ended June 30, 1999 as compared to the
same period in 1998.
Interest Expense. Interest expense increased $437,000 to $2.4 million
during the quarter ended June 30, 1999, from $1.9 million in the quarter ended
June 30, 1998. This increase was primarily due to the $40 million Senior Note
offering which was completed in June 1999.
Interest Income. Interest income decreased $121,000 to $150,000 during
the quarter ended June 30, 1999 from $271,000 in the quarter ended June 30,
1998. The decreased level of interest income was primarily due to lower cash on
hand during the quarter as we invested in acquisitions and new club
construction.
Benefit for Income Tax. The income tax benefit for the quarter ended
June 30, 1999 was $76,000 compared $64,000 for the quarter ended June 30, 1998.
Accreted Dividends on Preferred Stock. Accreted dividends on preferred
stock increased $1.3 million to $2.0 million during the quarter ended June 30,
1999, from $622,000 in the quarter ended June 30, 1998. This increase is
primarily a result of the accreted dividends on the $40.0 million redeemable
senior preferred stock which was issued in November 1998.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased approximately $26.0 million, or 53.4%, to
$74.8 million during six months ended June 30, 1999 from $48.7 million for the
six months ended June 30, 1998. This increase resulted primarily from the
continuing maturation of the 30 clubs opened or acquired during calendar 1998
(approximately $16.8 million) and the eleven clubs opened or acquired in the
first six months of 1999 (approximately $2.7 million). In addition, revenues
increased during the quarter at the clubs opened or acquired prior to calendar
1998 (approximately $7.4 million).
Operating Expenses. Operating expenses increased $25.6 million, or
57.5%, to $70.0 million in the six months ended June 30, 1999, from $44.4
million in the six months ended June 30, 1998. The increase was primarily due to
$22.2 million of direct expenses associated with clubs added in calendar 1998
and 1999.
Payroll and related increased by $9.9 million, or 51.3% to $29.2
million for the six months ended June 30, 1999, from $19.3 million for the six
months ended June 30, 1998. The increase was primarily due to a 65.1% increase
in total months of club operations to 417 for the six months ended June 30, 1999
from 253 for the six months ended June 30, 1998 and the related increase in
headcount.
Club operating increased by $9.9 million or 64.7% to $25.3 million for
the six months ended June 30, 1999, from $15.4 million for the six months ended
June 30, 1998. The increase was primarily due to a 65.1% increase in total
months of club operations to 417 for the six months ended June 30, 1999 from 253
for the six months ended June 30, 1998.
General and administrative increased by $1.0 million, or 27.5% to $4.8
million for the six months ended June 30, 1999, from $3.8 million, for the six
months ended June 30, 1998. This increase is attributable to expenses associated
with our expansion, including the expansion of our corporate office, employee
recruitment expenses and increases in voice and data communication expenses. In
March 1999 we moved our membership billing processing center to a purpose-built
location separate from our corporate office.
Depreciation and amortization increased by $4.9 million, or 100.9% to
$9.8 million for the six months ended June 30, 1999, from $4.9 million for the
six months ended June 30, 1998. This increase is attributable primarily to a
full period of depreciation and amortization for fixed asset additions,
acquisitions or openings during the six months ended June 30, 1998 and the
increased fixed and intangible assets arising out of new club acquisitions and
openings subsequent to June 30, 1998.
Compensation expense in connection with stock options decreased
$252,000 or 22.9% to $849,000 for the six months ended June 30, 1999 from $1.1
million for the six months ended June 30, 1998. This decrease is principally due
to less options vesting in the six months ended June 30, 1998 compared to the
same period in 1998.
Interest Expense. Interest expense increased $337,000 to $4.5 million
for the six months ended June 30, 1999, from $4.2 million for the six months
ended June 30, 1998. This increase was primarily due to the $40 million Senior
Note offering which was completed in June of 1999.
Interest Income. Interest income decreased $370,000 to $400,000 for the
six months ended June 30, 1999 from $770,000 for the six months ended June 30,
1998. The decreased level of interest income was primarily due to lower cash on
hand during the period as we invested in acquisitions and new club construction.
Provision for Income Tax. The income tax provision for the six months
ended June 30, 1999 was $319,000 compared to a tax provision of $401,000 for the
six months ended June 30, 1998.
Accreted Dividends on Preferred Stock. Accreted dividends on preferred
stock increased $2.6 million to $3.9 million for the six months ended June 30,
1999, from $1.2 million for the six months ended June 30, 1998. This increase is
primarily a result of the accreted dividends on the $40.0 million redeemable
senior preferred stock which was issued in November 1998.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have satisfied our 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
six months ended June 30, 1999 was $18.1 million compared to $8.3 million for
the six months ended June 30, 1998, an increase of $9.8 million. Clubs opened
prior to 1998 contributed an increase in cash flow contribution of approximately
$10.3 million. Excluding cash and cash equivalents, we normally operate with a
working capital deficit because we receive 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, we have no material accounts receivable. In addition,
because initiation fees are received at enrollment and are recognized over the
estimated average term of membership, we record a deferred revenue liability. We
believe that our working capital deficit is an important source of cash flow
from operating activities that we believe will continue to grow as our
membership revenues increase.
INVESTING ACTIVITIES. We invested $29.6 million and $2.0 million in
capital expenditures and business acquisitions, respectively, during the six
months ended June 30, 1999. We currently estimate total capital expenditure and
asset acquisition requirements for the remaining two quarters of 1999 to
approximate $30.0 million, which includes $12.0 million for the renovation
and expansion of certain existing clubs, $2.8 million to maintain certain
existing clubs and $2.0 million to further upgrade our management information
systems.
FINANCING ACTIVITIES. In June of 1998 we completed a placement of an
additional $40.0 million of Senior Notes issued at a price of 98.75% providing
$39.5 million of cash proceeds before expenses related to the issuance. Expenses
related to the issuance amounted to approximately $3.7 million.
We have a line of credit with our principal bank for direct borrowings
and letters of credit of up to $25 million. The line of credit contains
restrictive covenants, including a leverage ratio and interest coverage ratio
and dividend payment restrictions and is collateralized by all the assets of the
Company. As of June 30, 1999, we have approximately $23.2 million available
under the line of credit, which matures in October 2002, and has no scheduled
amortization requirements.
YEAR 2000 COMPLIANCE
We have implemented a three phase program to identify and resolve Year
2000 ("Y2K") issues related to the integrity and reliability of our computerized
information systems, computer systems embedded in the machinery and equipment
used in our operations, as well as third party or in-house developed software.
Phase one of our program involved an assessment of Y2K compliance and has been
completed. In phase two of the program, we are modifying, or replacing, and
testing all non-Y2K compliant hardware systems. Completion of Phase two is
expected by October 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 October 1999.
As of June 30, 1999 we have spent approximately $300,000 in addition to
our normal internal information technology costs in connection with our Y2K
program. We expect to incur additional costs of $350,000 to complete phases two
and three of the program.
We requested documentation regarding Y2K compliance from all of our
suppliers and service providers. As of June 30, 1999, we received confirmations
from approximately 80% indicating that they are, or will be, Y2K compliant. We
expect to have further communications with those who have not responded or have
indicated further work was required to achieve Y2K compliance.
Among other things, our 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 our financial results depending on the length
and severity of the disruption.
We have completed contingency plans for approximately half of our
principal operations and expect to
<PAGE>
complete the remainder of the contingency plans by October 1999. The purpose of
these contingency plans 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.
The estimates and conclusions herein contain forward-looking statements
and are based on our best estimates of future events. Risks to completing the
plan include the availability of resources, our ability to discover and correct
the potential Y2K sensitive problems which could have a serious impact on
specific facilities, and the ability of suppliers to bring their systems into
Y2K compliance.
FORWARD-LOOKING STATEMENTS
Certain statements in this report on Form 10-Q of the Company for the
three month and six month periods ended June 30, 1999 are forward-looking
statements, including, without limitation, statements regarding future financial
results and performance, and potential sales revenue. These statements are
subject to various risks and uncertainties, many of which are outside our
control, including the level of market demand for our services, competitive
pressures, the ability to achieve reductions in operating costs and to continue
to integrate acquisitions, 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, we do not intend to update this
information to reflect development or information obtained after the date hereof
and disclaim any legal obligation to the contrary.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(3.4) Certificate of Amendment of the Certificate of Incorporation, dated
April 9, 1999.
(27.1) Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to requirements 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.
TOWN SPORTS INTERNATIONAL, INC.
(Registrant)
DATE: August 9, 1999 BY: /s/ RICHARD PYLE
--------------------
Richard Pyle
Chief Financial Officer
(principal financial and
accounting officer)
DATE: August 9, 1999 BY: /s/ MARK SMITH
--------------------
Mark Smith
Chief Executive Officer
(principal executive officer)
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
(3.4) Certificate of Amendment of the Certificate of Incorporation, dated
April 9, 1999.
(27.1) Financial Data Schedule (to be filed electronically).
<PAGE>
Exhibit 3.4
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
change certain terms of Series A Preferred Stock and Series B Preferred Stock.
FOURTH: 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:
ARTICLE IV
AUTHORIZED CAPITAL STOCK
I. AUTHORIZED SHARES
The total number of shares of capital stock which the
Corporation has authority to issue is 3,500,000 shares, consisting of:
(1) 2,500,000 shares of Class A Common Stock, par value $.001 per share
(the "CLASS A COMMON");
(2) 500,000 shares of Class B Common Stock, par value $.001 per share
(the "CLASS B COMMON");
(3) 100,000 shares of Senior Preferred Stock, par value $1.00 per share
(the "SENIOR PREFERRED Stock");
(4) 200,000 shares of Series A Preferred Stock, par value $1.00 per
share (the "SERIES A PREFERRED STOCK"); and
<PAGE>
(5) 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 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.
II. 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.
1. DIVIDENDS.
1A. 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.
1B. 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.
<PAGE>
1C. 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 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.
1D. 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.
2. 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.
3. REDEMPTIONS.
3A. 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 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
<PAGE>
Senior Share equal to the Liquidation Value thereof (plus all accumulated,
accrued and unpaid dividends thereon).
3B. 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.
3C. 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.
3D. 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 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.
3E. 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
<PAGE>
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.
3F. 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.
3G. 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.
3H. 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.
3I. 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.
4. CONVERSION OF SENIOR PREFERRED STOCK.
4A. 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.
4B. 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
<PAGE>
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.
4C. 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.
4D. 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.
4E. 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 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.
4F. 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.
5. 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.
6. 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
<PAGE>
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 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.
7. 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.
8. 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.
<PAGE>
9. 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).
"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.
"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
<PAGE>
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.
10. 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
<PAGE>
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.
11. 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).
III. 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.
1. DIVIDENDS.
1A. 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 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.
1B. 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.
<PAGE>
1C. 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.
1D. PAYMENT OF STOCK DIVIDENDS. In the sole discretion of the
Corporation, any dividends accruing on the Shares may be paid, in lieu of cash
dividends, by the issuance of additional Shares (including fractional Shares)
having an aggregate Liquidation Value at the time of such payment equal to the
amount of the dividend to be paid (such Shares, the "Dividend Shares");
PROVIDED, that (I) if the Corporation pays less than the total amount of
dividends then accrued on the Junior Preferred Stock in the form of Dividend
Shares, such payment in Dividend Shares shall be made PRO RATA to the holders of
Shares based upon the aggregate accrued but unpaid dividends on the Shares held
by each such holder and (ii) Section 3H below shall not apply to any and all
Dividend Shares.
2. 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.
3. REDEMPTIONS.
3A. 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.
3B. 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
<PAGE>
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.
3C. 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.
3D. DETERMINATION OF THE NUMBER OF EACH HOLDER'S SHARES TO BE
REDEEMED. Except as otherwise provided herein, the number of Shares of Junior
Preferred 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.
3E. 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.
3F. 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.
3G. 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.
<PAGE>
3H. 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 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.
3I. 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.
4. VOTING RIGHTS. The Shares of Junior Preferred Stock will not have any voting
rights attaching to them, except as required by applicable law.
5. 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
<PAGE>
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.
6. 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 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.
7. 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,
<PAGE>
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 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.
8. 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.
9. 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).
IV. 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.
1. VOTING RIGHTS. Except as otherwise provided in this Section IV or as
otherwise required by applicable law:
(i) 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
(i) the holders of Class B Common will not have any voting
rights.
<PAGE>
2. 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.
3. 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.
4. CONVERSION OF COMMON STOCK.
4A. 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.
4B. 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
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.
4C. 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.
4D. 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
<PAGE>
conversion and the related issuance of Class A Common.
4E. 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).
4F. 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.
5. 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.
6. 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.
7. 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
<PAGE>
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.
8. 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).
9. 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 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.
10. 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).
FIFTH: 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.
* * * *
IN WITNESS WHEREOF, the undersigned has subscribed this
document as of April 9, 1999 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.
<PAGE>
TOWN SPORTS INTERNATIONAL, INC.
By: /s/ RICHARD PYLE
---------------------------
Name: Richard Pyle
Title: CFO Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at June 30, 1999 and the consolidated statement of
operations for the six months ended June 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 40,828
<SECURITIES> 0
<RECEIVABLES> 421
<ALLOWANCES> 0
<INVENTORY> 1,159
<CURRENT-ASSETS> 43,738
<PP&E> 134,254
<DEPRECIATION> (29,240)
<TOTAL-ASSETS> 209,309
<CURRENT-LIABILITIES> 28,781
<BONDS> 0
39,348
21,975
<COMMON> 1
<OTHER-SE> (25,783)
<TOTAL-LIABILITY-AND-EQUITY> 209,309
<SALES> 0
<TOTAL-REVENUES> 74,770
<CGS> 0
<TOTAL-COSTS> 70,012
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 4,124
<INCOME-PRETAX> 634
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</TABLE>
