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As filed with the Securities and Exchange Commission on January 9, 1998
Registration No. 333-40907
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TOWN SPORTS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
NEW YORK 7991 13-2749906
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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C/O MARK SMITH
CHIEF EXECUTIVE OFFICER
TOWN SPORTS INTERNATIONAL, INC.
888 SEVENTH AVENUE
NEW YORK, NEW YORK 10106
TELEPHONE: (212) 246-6700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPY TO:
JOSHUA N. KORFF
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Telephone: (212) 446-4800
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective. If the
securities being registered on this Form are being offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL NOR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 6, 1998
PRELIMINARY PROSPECTUS
OFFER FOR ALL OUTSTANDING 9 3/4% SENIOR NOTES DUE 2004
IN EXCHANGE FOR SERIES B 9 3/4% SENIOR NOTES DUE 2004 OF
TOWN SPORTS INTERNATIONAL
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED.
TOWN SPORTS INTERNATIONAL ("TSI" and, collectively with its subsidiaries,
the" Company") hereby offers to exchange an aggregate principal amount of up to
$85,000,000 of its Series B 9 3/4% Senior Notes due 2004 (the "New Notes") for a
like principal amount of its 9 3/4% Senior Notes due 2004 (the "Old Notes")
outstanding on the date hereof upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"). The New Notes and the Old Notes are
collectively hereafter referred to as the "Notes." The terms of the New Notes
are identical in all material respects to those of the Old Notes, except for
certain transfer restrictions and registration rights relating to the Old Notes.
The New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of the Indenture governing the Old
Notes dated October 16, 1997 (the "Indenture"). The New Notes will be general
unsecured obligations of the Company and will rank PARI PASSU in right of
payment with all existing and future unsubordinated indebtedness of the Company
and senior in right of payment with all existing and future subordinated
indebtedness of the Company. The Notes will be effectively subordinated in right
of payment to all secured indebtedness of the Company (including indebtedness
incurred under the New Credit Facility). As of August 31, 1997, on a pro forma
basis after giving effect to the Initial Offering (as defined), the Company and
its subsidiaries would have had approximately $90.0 million in indebtedness
outstanding, excluding trade credit of $4.5 million, and $13.9 million of
availability under the New Credit Facility. The ratio of total indebtedness to
total capital is 130%.
Upon a Change of Control (as defined), (i) the Company will have the option,
at any time on or prior to October 15, 2002, to redeem the Notes in whole but
not in part at a redemption price equal to 100% of the principal amount thereof,
plus the Applicable Premium (as defined) as of, and accrued and unpaid interest,
if any, to the date of redemption and (ii) if the Company does not so redeem the
Notes or if such Change of Control occurs after October 15, 2002, the Company
will be required to make an offer to purchase all outstanding Notes at a price
equal to 101% of the principal amount thereof plus accrued interest to the date
of purchase. There can be no assurance that the Company will have the financial
resources necessary to repurchase the Notes upon a Change of Control. See
"Description of Notes."
The Company will accept for exchange any and all Notes validly tendered and
not withdrawn prior to 5:00 p.m., New York City time, on , 1997, unless
extended by the Company in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, the Company will not extend the Expiration Date
beyond , 1997. Tenders of Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Notes were sold by the Company on October 16, 1997 to the
Initial Purchaser (as defined) in a transaction (the "Initial Offering") not
registered under the Securities Act in reliance upon an exemption under the
Securities Act. The Initial Purchaser subsequently placed the Notes with
qualified institutional buyers in reliance upon Rule 144A under the Securities
Act. Accordingly, the Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered hereunder in order
to satisfy certain obligations of the Company and contained in the Registration
Rights Agreement dated October 16, 1997 (the "Registration Rights Agreement"),
among the Company and BT Alex. Brown, Incorporated (the "Initial Purchaser"),
with respect to the Initial Offering. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties (including, without
limitation, the letters of the Commission to (i) Exxon Capital Holdings
Corporation, available May 13, 1988, (ii) Morgan Stanley & Co., Inc., available
June 5, 1991 and (iii) Shearman & Sterling, available July 2, 1993), the Company
believes the New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of the Company or its subsidiaries within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Notes are acquired in the ordinary course of such holder's business
and such holder has no arrangement or understanding with any person to
participate in the distribution of such Notes. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and "The Exchange Offer--Resale of the New
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of the New Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus available to any Participating
Broker-Dealer for use in connection with any such resale. See "Plan of
Distribution."
Holders of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indentures and with respect to transfer under the Securities Act. The Company
will pay all the expenses incurred by it incident to the Exchange Offer. See
"The Exchange Offer."
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Prior to the Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, such New Notes could trade
at a discount from their principal amount. The Company currently does not intend
to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotation system and no active public market for
the New Notes is currently anticipated. There can be no assurance that any
public market for the New Notes will develop. The Exchange Offer is not
conditioned on any minimum principal amount of Old Notes being tendered for
exchange pursuant to the Exchange Offer. See "Risk Factors--Absence of a Public
Market." Moreover, to the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Notes could be adversely affected.
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND IN
CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE
OF THIS PROSPECTUS IS , 1997.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS". ALL STATEMENTS OTHER
THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING
WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE "PROSPECTUS SUMMARY," "THE
COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED ELSEWHERE HEREIN REGARDING THE
COMPANY'S FINANCIAL POSITION AND BUSINESS STRATEGY, MAY CONSTITUTE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS,
INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS." ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS.
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE
INVESTORS ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. UNLESS OTHERWISE
INDICATED, ALL REFERENCES TO FISCAL YEARS CONTAINED HEREIN SHALL BE DEEMED TO
REFER TO THE APPLICABLE FISCAL YEAR OF THE COMPANY, WHICH ENDS ON MAY 31 OF THE
APPLICABLE CALENDAR YEAR. IN ADDITION, UNLESS OTHERWISE INDICATED, ALL SOURCES
FOR ALL INDUSTRY DATA AND STATISTICS CONTAINED IN OR DERIVED FROM INTERNAL OR
INDUSTRY SOURCES BELIEVED BY THE COMPANY TO BE RELIABLE. AS USED HEREIN, THE
"COMPANY" REFERS TO TOWN SPORTS INTERNATIONAL, INC. AND ITS SUBSIDIARIES.
IN ADDITION, THE FOLLOWING DISCUSSION MAKES REFERENCE TO ADJUSTED EBITDA
WHICH IS DEFINED AS EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION, DEFERRED LEASE EXPENSE AND COMPENSATION EXPENSE IN CONNECTION WITH
STOCK OPTIONS. INVESTORS SHOULD BE AWARE THAT THE ITEMS EXCLUDED FROM ADJUSTED
EBITDA, SUCH AS DEPRECIATION AND AMORTIZATION, ARE SIGNIFICANT COMPONENTS IN AN
ACCURATE ASSESSMENT OF THE COMPANY'S FINANCIAL PERFORMANCE. ADJUSTED EBITDA IS
PRESENTED BECAUSE MANAGEMENT BELIEVES IT PROVIDES USEFUL INFORMATION REGARDING A
COMPANY'S ABILITY TO INCUR AND/OR SERVICE DEBT. ADJUSTED EBITDA SHOULD NOT BE
CONSIDERED IN ISOLATION OR AS A SUBSTITUTE FOR NET INCOME, CASH FLOWS, OR OTHER
CONSOLIDATED INCOME OR CASH FLOW DATA PREPARED IN ACCORDANCE WITH GAAP (AS
DEFINED) OR AS A MEASURE OF A COMPANY'S PROFITABILITY OR LIQUIDITY.
ADDITIONALLY, INVESTORS SHOULD BE AWARE THAT ADJUSTED EBITDA MAY NOT BE
COMPARABLE TO SIMILARLY TITLED MEASURES PRESENTED BY OTHER COMPANIES.
THE COMPANY
The Company is a leading owner and operator of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States and the largest operator
of fitness clubs in Manhattan. As of August 31, 1997, the Company operated 36
clubs which collectively serve in excess of 90,000 members. The Company's
largest presence is in the New York metropolitan area, where it operates 27
clubs under the tradename "New York Sports Clubs" that collectively serve over
75,000 members. The Company also has a strong presence in the Washington, D.C.
metropolitan area with five clubs operating under the tradename "Washington
Sports Clubs" and has expanded its operations to include the Boston metropolitan
market where it has two clubs. The Company has experienced significant growth
over the past several years through a combination of developing new "greenfield"
club locations and acquiring existing clubs. From May 31, 1995 to August 31,
1997, the Company's club base has grown from 25 clubs to 36 clubs. Over the same
period, the Company's revenues and Adjusted EBITDA (as defined) have increased
from $33.3 million and $3.4 million, respectively, for the year ended May 31,
1995, to $61.4 million and $14.6 million, respectively, for the twelve months
ended August 31, 1997. At the same time, the net loss for the Company increased
from $0.7 million for the year ended May 31, 1995 to $0.9 million for the twelve
months ended August 31, 1997 principally due to increased non-cash charges such
as compensation expense in connection with stock options and depreciation and
amortization expense as well as increased interest expense net of the respective
tax effect.
The Company's clubs are conveniently located, reasonably priced,
state-of-the-art fitness facilities. The Company employs a regional clustering
strategy providing members access to clubs near both their work and home for a
single membership fee. This strategy allows the Company to maximize revenues by
charging members slightly higher monthly dues for the ability to use more than
one club in the chain and to attract and retain members by offering greater
convenience and a broader range of facilities and services than its smaller
competitors. The Company's regional clustering strategy also allows the Company
to achieve economies of scale with regard to sales, marketing, purchasing and
corporate administrative expenses. In addition, the Company's emphasis on
monthly dues and use of its electronic funds transfer system allows the Company
to generate stable and predictable cash flows and makes the Company less
dependent on new membership sales and price discounting than certain of its
competitors.
Over its 24-year operating history, the Company has developed and refined a
model club format that allows the Company to cost effectively construct and more
efficiently operate its fitness clubs. The Company's model club is 15,000 to
25,000 square feet and features a wide variety of state-of-the-art
cardiovascular and strength-training equipment, as well as exercise studios
offering extensive group fitness
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programs. Certain clubs also feature additional amenities, including swimming
pools, squash or tennis courts and physical therapy centers. The Company offers
members a variety of other services for which it receives additional fees,
including personal training. The Company's typical member is 20 to 44 years of
age, college educated and earns in excess of $50,000 per annum.
INDUSTRY OVERVIEW
According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, revenues generated by the
United States fitness club industry increased at a compound annual rate of 9.4%
from $5.5 billion in 1991 to $8.6 billion in 1996. Over the same period,
memberships in all clubs have grown at a 4.5% compound annual growth rate, from
16.7 million to 20.8 million. Both fitness club revenues and memberships have
benefited from the increasing awareness among the general public of the
importance of physical exercise. In July 1996, the Surgeon General issued a
report on Physical Activity and Health highlighting the connection between
regular physical exercise and better health. The Company believes the Surgeon
General's report and other medical evidence supporting the importance of regular
physical exercise are leading more Americans to become increasingly health
conscious and to regularly incorporate exercise into their lives.
The fitness club industry in the United States is highly fragmented.
According to IHRSA, there were more than 13,000 commercial fitness clubs in
operation during 1996. According to Club Industry magazine, however, the ten
largest companies in the industry account only for approximately 15% of all
industry revenue and own less than 10% of all clubs. The Company believes that
independent operators have found it increasingly difficult to compete with
multi-facility operators like the Company that enjoy substantial economies of
scale. Management believes the long-term trend of increasing fitness awareness
and the fragmented nature of the industry make it attractive for continued
investment.
COMPETITIVE STRENGTHS
The Company attributes its opportunities for continued growth and increased
profitability to the following competitive strengths:
STRONG MARKET POSITION. The Company believes it is among the five largest
fitness club operators in the United States, as measured by consolidated
revenues. The Company is the largest operator of fitness clubs in Manhattan with
20 clubs, making it more than twice as large as its nearest competitor. The
Company believes there are only four chains that own and operate more than ten
clubs in the Northeast and Mid-Atlantic markets, and the Company has the
opportunity to maintain, or establish, a leadership position in each of these
markets. The Company attributes its leadership position to the success of its
regional clustering strategy, the consistency of facilities and services
provided by its clubs, and the ability to continue to attract new members by
providing one of the most attractive price/value combinations available in its
markets.
SUCCESSFUL REGIONAL CLUSTERING STRATEGY. The Company believes its regional
clustering strategy allows it to maximize cash flows by providing higher
quality, conveniently located fitness facilities on a cost effective basis. By
operating a group of clubs in a concentrated geographic area, the value of
Company memberships is enhanced by the ability to offer memberships that allow
the member to use any of the Company's clubs at any time ("Passport
Membership"). This membership appeals primarily to consumers who seek the
convenience of having a fitness club near their home and their workplace.
Approximately 55% of all members choose the Passport Membership, and because
these memberships offer broader privileges and greater convenience, they
generate higher monthly dues than single club memberships. Regional clustering
also allows the Company to provide special facilities within the market without
offering them at each location (e.g., squash, tennis, special programs, and
swimming pools). The Company believes its regional clustering strategy allows it
to achieve economies of scale with regard to sales, marketing, purchasing and
corporate administrative expenses.
STABLE CASH FLOWS. The Company believes that its emphasis on affordable
monthly dues and its electronic funds transfer ("EFT") system allows it to
generate stable and predictable cash flows. The Company charges a modest
initiation fee ($115 on average) and monthly dues of $53-$76, depending on
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the type of membership plan. The Company believes that its monthly dues
structure gives it a significant competitive advantage in terms of ease of sale
and collection and revenue collected per year and makes the Company less
dependent on new membership sales, and price discounting, than certain of its
competitors. The Company also believes its use of EFT, by which a member's
credit card or bank account is automatically debited for each month's dues,
assures a more stable cash flow, eliminates the traditional accounts receivable
function and minimizes bad-debt write-offs. Approximately 90% of the Company's
members pay their monthly dues through EFT, accounting for more than 70% of
monthly revenues.
PROVEN UNIT OPERATING PERFORMANCE. The Company has established a track
record of consistent growth in revenue and cash flow across its club base. The
Company's 12 wholly-owned clubs in operation at the end of fiscal 1993 generated
revenues, Adjusted EBITDA (before corporate expenses) and operating income
(before corporate expenses) of $25.0 million, $8.9 million and $8.1 million,
respectively, during fiscal 1997 as compared to $20.0 million, $6.9 million and
$4.9 million, respectively, during fiscal 1993. In addition, over its 24-year
history, the Company has never closed a club.
EXPERIENCED MANAGEMENT TEAM. The Company believes that it possesses one of
the most experienced management teams in the industry. The Company's five senior
executives have over 60 years of combined experience in the fitness club
industry and 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. In the aggregate, management owns
approximately 28% of the capital stock of the Company, on a fully-diluted basis.
BUSINESS STRATEGY
The Company intends to significantly increase revenue and cash flow using
the following strategies:
MATURATION OF RECENTLY OPENED CLUBS. Since the beginning of fiscal 1996,
the Company has opened or acquired 12 clubs. Management believes that the
Company's recent financial performance does not yet fully reflect the benefit of
these new clubs. 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 there is relatively little incremental
cost associated with such increasing revenues, there is a greater proportionate
increase in profitability. In the aggregate, the 12 clubs opened or acquired
between May 31, 1995 and August 31, 1997 generated revenues, Adjusted EBITDA
(before corporate expenses) and operating income (before corporate expenses) of
$14.0 million, $3.0 million and $0.1 million, respectively, during the last
twelve months ended August 31, 1997. The Company believes that the revenues,
Adjusted EBITDA (before corporate expenses) and operating income (before
corporate expenses) of these 12 clubs will significantly increase as the clubs
reach maturity.
EXPANSION OF CLUB BASE. Management intends to strengthen the Company's
market position in the Northeast and Mid-Atlantic regions and increase revenues
and cash flow through the opening of new clubs and the acquisition of existing
clubs. Before opening or acquiring a new club, management undertakes a rigorous
process involving site selection, demographic and competitive analysis,
negotiation of lease and acquisition terms and financial modeling to ensure that
a location meets the Company's criteria for a model club. As of August 31, 1997,
the Company had identified over 30 locations in its targeted markets which it
believes possess the criteria for a model club. Because of the Company's
historical success with opening new clubs and the number of opportunities
currently available to increase the club base, the Company expects to open or
acquire approximately 15 clubs by the end of fiscal 1999.
INCREASED VALUE-ADDED SERVICES. In addition to the Company's regional
clustering strategy, the Company has recently focused on increasing the
additional services available to its members. These services, which include
personal training, generate incremental revenues with minimal capital investment
and assist in the process of attracting and retaining members. The increased
emphasis on these value-added services have contributed to the Company's growth,
as non-membership club revenues have increased from $2.4 million, or 7.2% of
revenues in fiscal 1995, to $5.5 million, or 9.0% of revenues in the last twelve
months ended August 31, 1997.
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CORPORATE ORGANIZATION
TSI acts primarily as a holding company that derives operating income and
cash-flow from its subsidiaries. TSI also operates one fitness club and owns the
real estate housing that club. Each of TSI's wholly-owned subsidiaries is a
single-purpose subsidiary which enters into leases and/or operates one of the
Company's clubs. In December 1996, TSI consummated a merger (the "Merger")
pursuant to which, among other things, Bruckmann, Rosser, Sherrill & Co., L.P.
and certain of its employees and affiliates (collectively, "BRS") and certain
institutional investors and certain members of TSI's management acquired TSI's
newly authorized Common Stock, Series A Preferred Stock and Series B Preferred
Stock (each as defined). In addition, pursuant to the Merger, TSI instituted a
new option plan granting certain members of TSI's management options to acquire
TSI's newly authorized Series B Preferred Stock and Common Stock. In the
aggregate, management owns approximately 28% of the capital stock of the
Company, on a fully-diluted basis. See "Security Ownership" and "Certain
Relationships and Related Transactions."
The Company is incorporated under the laws of the State of New York. The
Company's principal executive offices are located at 888 Seventh Avenue, New
York, New York 10106, and its telephone number is (212) 246-6700.
THE INITIAL OFFERING
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NOTES............................. $85 million aggregate principal amount of 9 3/4% Senior
Notes due 2004 (the "Old Notes") were sold by the
Company on October 16, 1997 (the "Initial Offering") to
BT Alex. Brown, Incorporated (the "Initial Purchaser")
pursuant to a Purchase Agreement dated October 9, 1997
(the "Purchase Agreement"). The Initial Purchasers
subsequently resold the Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities Act
and to a limited number of institutional accredited
investors who agreed to comply with certain transfer
restrictions and other conditions.
REGISTRATION RIGHTS AGREEMENT..... Pursuant to the Purchase Agreement, the Company and the
Initial Purchaser entered into a Registration Rights
Agreement dated October 16, 1997 (the "Registration
Rights Agreement"), which granted the holder of the
Notes certain exchange and registration rights. The
Exchange Offer is intended to satisfy such exchange
rights which shall then terminate upon the consummation
of the Exchange Offer.
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THE EXCHANGE OFFER
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SECURITIES OFFERED................ Up to $85 million aggregate principal amount of Series B
9 3/4% Senior Notes due 2004 (the "New Notes"). The
terms of the New Notes and the Old Notes are identical
in all material respects, except for certain transfer
restrictions and registration rights relating to the Old
Notes.
THE EXCHANGE OFFER................ The New Notes are being offered in exchange for a like
principal amount of Old Notes. Old Notes may be
exchanged only in integral multiples of $1,000. The
issuance of the New Notes is intended to satisfy
obligations of the Company contained in the Registration
Rights Agreement.
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The Company will issue the New Notes to holders on or
promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties (including, without limitation, the
letters of the Commission to (i) Exxon Capital Holdings
Corporation, available May 13, 1988, (ii) Morgan Stanley
& Co., Inc., available June 5, 1991 and (iii) Shearman &
Sterling, available July 2, 1993), the Company believes
that the New Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder thereof
(other than any such holder which is an "affiliate" of
the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the
ordinary course of such holder's business and that such
holder does not intend to participate and has no
arrangement or understanding with any person to
participate in the distribution of such New Notes. See
"The Exchange Offer--Certain Conditions to the Exchange
Offer."
Each Participating Broker-Dealer that receives the New
Notes for its own account pursuant to the Exchange Offer
must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. The
Prospectus, as it may be amended or supplemented from
time to time, may be used by a Participating
Broker-Dealer in connection with resales of New Notes
received in exchange for Old Notes where such Notes were
acquired by such Participating Broker-Dealer as a result
of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make the Prospectus
available to any Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may
not be offered for sale unless they have been registered
or qualified for sale in such jurisdiction or an
exemption from registration or qualification is
available and is complied with. The Company has agreed,
pursuant to the Registration Rights Agreement and
subject to certain specified limitations therein, to
register or qualify the New Notes for offer or sale
under the securities of blue sky laws of such
jurisdictions as any holder of the Notes reasonably
requests in writing. If a holder of Old Notes does not
exchange such Old Notes for New Notes pursuant to the
Exchange Offer, such Old Notes will continue to be
subject to the restrictions on transfer contained in the
legend thereon. In general, the Old Notes may
</TABLE>
7
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<S> <C>
not be offered for sale, unless registered under the
Securities Act, except pursuant to an exemption from, or
in a transaction not subject to, the Securities Act and
applicable state securities laws. Holders of Old Notes
do not have any appraisal or dissenters' rights under
the Delaware General Corporation Law in connection with
the Exchange Offer. See "The Exchange
Offer--Consequences of Failure to Exchange; Resales of
New Notes."
The Old Notes are currently eligible for trading in
Private Offerings, Resales and Trading through Automated
Linkages ("PORTAL") market. Following commencement of
the Exchange Offer but prior to its consummation, the
Old Notes may continue to be traded in the PORTAL
market. Following consummation of the Exchange Offer,
the New Notes will not be eligible for PORTAL trading.
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the New Notes could
not rely on the position of the staff of the Commission
enunciated in no-action letters and, in the absence of
an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the
Securities Act in connection with any resale
transaction. Failure to comply with such requirements in
such instance may result in such holder incurring
liability under the Securities Act for which the holder
is not indemnified by the Company.
EXPIRATION DATE................... 5:00 p.m., New York City time, on , 1997
unless the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time to
which the Exchange Offer is extended.
ACCRUED INTEREST ON THE EXCHANGE
NOTES AND THE NOTES............. Each New Note will bear interest from its issuance date.
Holders of Old Notes that are accepted for exchange will
receive, in cash, accrued interest thereon to, but not
including, the issuance date of the New Notes. Such
interest will be paid with the first interest payment on
the New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New
Notes.
CONDITIONS TO THE EXCHANGE
OFFER........................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer--Conditions."
PROCEDURES FOR TENDERING NOTES.... Each holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the Notes
and any other required documentation to the Exchange
Agent (as defined) at the address set forth herein. By
executing the Letter of Transmittal, each holder will
represent to the Company
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8
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<S> <C>
that, among other things, the New Notes acquired
pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such
Notes, whether or not such person is the holder, that
neither the holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of the New Notes and
that neither the holder nor any such other person is an
"affiliate," as defined under Rule 405 of the Securities
Act, of the Company. See "The Exchange Offer--Purpose
and Effect of the Exchange Offer" and "--Procedures for
Tendering."
UNTENDERED NOTES.................. Following the consummation of the Exchange Offer,
holders of Notes eligible to participate but who do not
tender their Notes will not have any further exchange
rights and such Notes will continue to be subject to
certain restrictions on transfer. Accordingly, the
liquidity of the market for such Notes could be
adversely affected.
CONSEQUENCES OF FAILURE TO
EXCHANGE........................ The Notes that are not exchanged pursuant to the
Exchange Offer will remain restricted securities.
Accordingly, such Notes may be resold only (i) to the
Company, (ii) pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some other exemption
under the Securities Act, (iii) outside the United
States to a foreign person pursuant to the requirements
of Rule 904 under the Securities Act or (iv) pursuant to
an effective registration statement under the Securities
Act. See "The Exchange Offer--Consequences of Failure to
Exchange."
SHELF REGISTRATION STATEMENT...... If any holder of the Notes (other than any such holder
which is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) is not
eligible under applicable securities laws to participate
in the Exchange Offer, and such holder has provided
information regarding such holder and the distribution
of such holder's Notes to the Company for use therein,
the Company has agreed to register the Notes on a shelf
registration statement (the "Shelf Registration
Statement") and use its best efforts to cause it to be
declared effective by the Commission as promptly as
practical on or after the consummation of the Exchange
Offer. The Company has agreed to maintain the
effectiveness of the Shelf Registration Statement for,
under certain circumstances, a maximum of two years, to
cover resales of the Notes held by any such holders.
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.......................... Any beneficial owner whose Notes are registered in the
name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to tender should contact
such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on
such owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and
delivering its Notes, either make appropriate arrange-
ments to register ownership of the Notes in such owner's
name
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9
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<S> <C>
or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership
may take considerable time. The Company will keep the
Exchange Offer open for not less than twenty days in
order to provide for the transfer of registered
ownership.
GUARANTEED DELIVERY PROCEDURES.... Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who cannot
deliver their Notes, the Letter of Transmittal or any
other documents required by the Letter of Transmittal to
the Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date must
tender their Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer-- Guaranteed
Delivery Procedures."
WITHDRAWAL RIGHTS................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
ACCEPTANCE OF NOTES AND DELIVERY
OF NEW NOTES.................... The Company will accept for exchange any and all Notes
which are properly tendered in the Exchange Offer prior
to 5:00 p.m., New York City time, on the Expiration
Date. The New Notes issued pursuant to the Exchange
Offer will be delivered promptly following the
Expiration Date. See "The Exchange Offer--Terms of the
Exchange Offer."
USE OF PROCEEDS................... There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.
EXCHANGE AGENT.................... The United States Trust Company of New York is serving
as the Exchange Agent in connection with the Exchange
Offer.
FEDERAL INCOME TAX CONSEQUENCES... The exchange of Notes pursuant to the Exchange Offer
should not be a taxable event for federal income tax
purposes. See "Certain Federal Income Tax
Considerations."
</TABLE>
THE NEW NOTES
<TABLE>
<S> <C>
GENERAL........................... The form and terms of the New Notes are the same as the
form and terms of the Old Notes (which they replace)
except that (i) the New Notes have been registered under
the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (ii) the holders of
New Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the
provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights will
terminate as a general matter when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and Effect
of the Exchange Offer." The New Notes will evidence the
same debt as the Notes and will be entitled to the
benefits of the Indenture. See "Description of the
Notes."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
ISSUER............................ Town Sports International, Inc.
SECURITIES OFFERED................ $85 million aggregate principal amount of Series B
9 3/4% Senior Notes due 2004.
MATURITY DATE..................... October 15, 2004
INTEREST PAYMENT DATES............ Interest on the Notes will accrue from the date of
original issuance (the "Issue Date"). Interest is
payable on April 15 and October 15 of each year,
commencing April 15, 1998.
RANKING........................... The Notes will be unsecured senior obligations of the
Company and will rank PARI PASSU in right of payment
with all existing and future unsubordinated indebtedness
of the Company and senior in right of payment with all
existing and future subordinated indebtedness of the
Company. The Notes will be effectively subordinated in
right of payment to all secured indebtedness of the
Company (including indebtedness incurred under the New
Credit Facility). As of August 31, 1997, on a pro forma
basis after giving effect to the Offering, the Company
would have had approximately $90.0 million of
indebtedness outstanding (and $13.9 million of secured
indebtedness available under the New Credit Facility).
OPTIONAL REDEMPTION............... The Notes will not be redeemable at the option of the
Company prior to October 15, 2001. Thereafter, the Notes
will be redeemable, at the Company's option, in whole or
in part from time to time, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any,
to the date of redemption. In addition, at any time and
from time to time prior to October 15, 2000, TSI may
redeem in the aggregate, with the net proceeds of one or
more Public Equity Offerings, up to 35% of the original
principal amount of the Notes at a redemption price of
109.750% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption.
See "Description of Notes-- Optional Redemption."
CHANGE OF CONTROL................. Upon the occurrence of a Change of Control, (i) the
Company will have the option, at any time on or prior to
October 15, 2002, to redeem the Notes in whole but not
in part at a redemption price equal to 100% of the
principal amount thereof, plus the Applicable Premium as
of, and accrued and unpaid interest, if any, to the date
of redemption and (ii) if the Company does not so redeem
the Notes or if such Change of Control occurs after
October 15, 2002, the Company will be required to make
an offer to purchase all outstanding Notes at a price
equal to 101% of the principal amount thereof plus
accrued interest to the date of purchase. There can be
no assurance that the Company will have the financial
resources necessary to repurchase the Notes upon the
Change of Control. See "Description of Notes-- Change of
Control."
CERTAIN COVENANTS................. The Indenture (as defined) under which the Notes will be
issued contains certain covenants that, among other
things, limit the
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11
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<S> <C>
ability of the Company and its Restricted Subsidiaries
(as defined) 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 Indenture will also restrict
the ability of the Company to consolidate or merge with,
or transfer all or substantially all of its assets to,
another person. See "Description of Notes--Certain Cove-
nants."
TRANSFER RESTRICTIONS; ABSENCE
OF A PUBLIC MARKET FOR
THE NOTES COVENANTS............. The New Notes are new securities and there is currently
no established market for the New Notes. Accordingly,
there can be no assurance as to the development or
liquidity of any market for the New Notes. The Initial
Purchasers have advised the Company that they currently
intend to make a market in the New Notes. However, they
are not obligated to do so, and any market-making with
respect to the New Notes may be discontinued without
notice. The Company does not intend to apply for listing
of the New Notes on any national securities exchange or
for their quotation through the National Association of
Securities Dealers Automated Quotation System. See "Risk
Factors-- Transfer Restrictions; Absence of Public
Market."
</TABLE>
For additional information regarding the New Notes, see "Description of Notes."
The address for the Company is 888 Seventh Avenue, New York, New York 10106
and the telephone number is (212) 246-6700.
RISK FACTORS
Holders of Notes should carefully consider all of the information set forth
in this Prospectus and, in particular, should evaluate the specific factors
under "Risk Factors" beginning on page 15 for risks in connection with the
Exchange offer.
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<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are summary historical consolidated financial data of the
Company for fiscal 1995, 1996 and 1997, the three month periods ended August 31,
1996 and August 31, 1997 and the twelve month period ended August 31, 1997. The
summary historical consolidated financial data as of May 31, 1995, May 31, 1996
and May 31, 1997, and for fiscal 1995, 1996 and 1997 were derived from the
audited Consolidated Financial Statements of the Company. The summary historical
consolidated financial data as of August 31, 1997, for the three month period
ended August 31, 1996 and for the three and twelve month period ended August 31,
1997 were derived from the Unaudited Consolidated Interim Financial Statements
of the Company for such periods, which, in the opinion of the management of the
Company, reflect all normal and recurring adjustments necessary to present
fairly the financial position and results of operations for the periods
presented. The information contained in this table should be read in conjunction
with "Selected Historical Consolidated Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the Financial
Statements and accompanying notes thereto appearing elsewhere in this
Registration Statement.
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
FISCAL YEAR ENDED ENDED
ENDED MAY 31, AUGUST 31, AUGUST 31,
------------------------------- -------------------- ---------------
1995 1996 1997 1996 1997 1997
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 33,349 $ 43,755 $ 56,567 $ 12,375 $ 17,198 $ 61,390
Operating expenses............................ 33,969 41,626 55,291 11,233 15,078 59,136
Operating income (loss)....................... (620) 2,129 1,276 1,142 2,120 2,254
Interest expense, net......................... 654 952 2,455 184 1,144 3,415
Income tax (benefit) provision................ (541) 628 (243) 475 450 (268)
Net income (loss)............................. (733) 549 (936) 483 526 (893)
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31,
1997
--------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED
--------- ---------
<CAPTION>
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................................... $ 702 $ 43,402
Total assets................................................................................. 55,874 101,314
Long-term debt, including current installments............................................... 43,905 90,018
Stockholders' deficit........................................................................ (6,265) (6,937)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
FISCAL YEAR ENDED ENDED
ENDED MAY 31, AUGUST 31, AUGUST 31,
------------------------------- -------------------- ---------------
1995 1996 1997 1996 1997 1997
--------- --------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
OTHER DATA:
Adjusted EBITDA(1)............................ $ 3,415 $ 8,302 $ 13,048 $ 2,756 $ 4,355 $ 14,647
Adjusted EBITDA margin........................ 10.2% 19.0% 23.1% 22.3% 25.3% 23.9%
Net cash provided by operating activities..... $ 3,283 $ 5,695 $ 12,009 $ 485 $ 819 $ 12,343
Net cash used in investing activities......... (7,673) (5,487) (13,278) (1,201) (3,473) (15,550)
Net cash provided by financing activities..... 4,244 144 2,809 278 888 3,419
Deferred lease expense(2)..................... 1,232 1,277 1,620 275 486 1,831
Compensation expense in connection with stock
options..................................... 635 1,967 5,933 450 160 5,643
Depreciation and Amortization................. 2,168 2,929 4,219 889 1,589 4,919
Capital expenditures.......................... 7,670 5,380 11,110 1,187 1,303 11,226
Wholly-owned clubs operated at end of
period(3)................................... 20 23 28 23 31 31
Total clubs operated at end of period(4)...... 25 28 35 28 36 36
Members at end of period(5)................... 45,600 55,500 70,500 55,600 80,500 80,500
PRO FORMA DATA(6):
Cash interest expense(7)............................................ $ 8,852
Ratio of Adjusted EBITDA to cash interest expense................... 1.7x
Net debt(8)......................................................... $ 46,616
Ratio of net debt to Adjusted EBITDA................................ 3.2x
</TABLE>
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- ------------------------
(1) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, deferred lease expense and compensation expense in
connection with stock options. Adjusted EBITDA is presented because
management believes it provides useful information regarding a company's
ability to incur and/or service debt. Adjusted EBITDA should not be
considered in isolation or as a substitute for net income, cash flows, or
other consolidated income or cash flow data prepared in accordance with GAAP
(as defined) or as a measure of a Company's profitability or liquidity.
Additionally, investors should be aware that Adjusted EBITDA may not be
comparable to similarly titled measures presented by other companies.
(2) Deferred lease expense reflects the difference between accrued rent expense
in accordance with GAAP and cash rent expense actually paid in a given
period, which difference is typically positive in the early years of a lease
and negative in the later years of a lease.
(3) During fiscal 1997, the Company opened or acquired six clubs and merged the
operations and membership of an existing wholly-owned club into one of the
newly opened clubs.
(4) Includes all clubs whether wholly-owned or managed.
(5) Represents members at wholly-owned clubs only.
(6) Information set forth under the caption "Pro Forma Data" has been adjusted
to give effect to the issuance of the Notes offered hereby and the
simultaneous closing of the New Credit Facility.
(7) Cash interest expense is defined as interest expense less amortization of
debt issuance costs.
(8) Net debt is defined as total debt less cash and cash equivalents.
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<PAGE>
RISK FACTORS
HOLDERS OF NOTES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS AS WELL AS
THE OTHER INFORMATION AND DATA INCLUDED IN THIS PROSPECTUS IN CONNECTION WITH
THE EXCHANGE OFFER. THE RISK FACTORS SET FORTH BELOW ARE GENERALLY APPLICABLE TO
THE OLD NOTES AS WELL AS THE NEW NOTES.
SUBSTANTIAL LEVERAGE
The Company is highly leveraged. As of August 31, 1997, on a pro forma basis
after giving effect to the Offering and the net proceeds therefrom, the
Company's total indebtedness would have been approximately $90.0 million
excluding trade credit of $4.5 million, and the ratio of total indebtedness to
total capital is 130%. In addition, subject to restrictions in the New Credit
Facility and the Indenture, the Company may incur up to $13.9 million of
borrowings under the New Credit Facility. See "Description of New Credit
Facility" and "Description of Notes."
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including: (i) a substantial portion of the Company's cash
flow from operations will be dedicated to debt service and may not be available
for other purposes; (ii) the Company's leveraged position may impede its ability
to obtain financing in the future for working capital, capital expenditures and
general corporate purposes, including acquisitions, and may impede its ability
to secure favorable lease terms; and (iii) the Company's leveraged financial
position may make it more vulnerable to economic downturns and may limit its
ability to withstand competitive pressures.
POTENTIAL INABILITY TO SERVICE DEBT
The Company's ability to pay interest on the Notes, to repay portions of its
long-term indebtedness (including the Notes and the New Credit Facility) and to
satisfy its other debt obligations will depend upon its future-operating
performance and the availability of refinancing indebtedness, which will be
affected by prevailing economic conditions and financial, business and other
factors, certain of which are beyond the Company's control. The Company expects
that for the twelve months ended August 31, 1998, subsequent to the pro forma
issuance of the Notes, $11.6 million will be dedicated to debt service. The
Company believes that, based on its current level of operations, it will have
sufficient capital to carry on its business and will be able to meet its
scheduled debt service requirements. However, there can be no assurance that the
future cash flow of the Company will be sufficient to meet the Company's
obligations and commitments. If the Company is unable to generate sufficient
cash flow from operations in the future to service its indebtedness and to meet
its other commitments, the Company will be required to adopt one or more
alternatives, such as refinancing or restructuring its indebtedness, selling
material assets or operations or seeking to raise additional debt or equity
capital. There can be no assurance that any of these actions could be effected
on a timely basis or on satisfactory terms or that these actions would enable
the Company to continue to satisfy its capital requirements. In addition, the
terms of existing or future debt agreements, including the Indenture (as
defined) and the New Credit Facility, may prohibit the Company from adopting any
of these alternatives. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Description of New Credit Facility" and "Description of Notes."
RESTRICTIONS IMPOSED BY THE COMPANY'S INDEBTEDNESS
The New Credit Facility requires the Company to maintain specified financial
ratios and tests, among other obligations, including interest coverage and total
leverage ratios. In addition, the New Credit Facility restricts, among other
things, the Company's ability to incur additional indebtedness and restricts the
ability of the Company to dispose of assets, incur additional indebtedness,
incur guarantee obligations, repay indebtedness or amend debt instruments, pay
dividends, create liens on assets, make investments, make acquisitions, engage
in mergers or consolidations or engage in certain transactions with subsidiaries
15
<PAGE>
and affiliates and otherwise restrict corporate activities. A failure to comply
with the restrictions contained in the New Credit Facility could lead to an
event of default thereunder which could result in an acceleration of such
indebtedness. Such an acceleration would constitute an event of default under
the Indenture relating to the Notes. In addition, the Indenture restricts, among
other things, the Company's ability to incur additional indebtedness, make
certain payments and dividends or merge or consolidate. A failure to comply with
the restrictions in the Indenture could result in an event of default under the
Indenture. See "Description of New Credit Facility" and "Description of Notes."
RANKING; ASSET ENCUMBRANCE
The Notes will be general unsecured senior obligations and will rank PARI
PASSU in right of payment with all existing and future unsubordinated
Indebtedness of the Company, including obligations under the New Credit
Facility. As of August 31, 1997, on a pro forma basis after giving effect to the
Offering, the Company would have had approximately $90.0 million of Indebtedness
outstanding (excluding $4.5 million of trade credit and $1.1 million of
outstanding standby letters of credit) and $13.9 million of secured indebtedness
available under the New Credit Facility. The Notes will be effectively
subordinated to all secured Indebtedness of the Company to the extent of the
value of the assets securing such Indebtedness. The Indebtedness of the Company
under the New Credit Facility is secured by liens upon real property and current
assets, including receivables, inventory, general intangibles and equipment. The
Indenture permits the Company to incur additional Indebtedness under the New
Credit Facility. In the event of a bankruptcy, liquidation or reorganization of
the Company, the assets of the Company will be available to pay obligations on
the Notes only after all secured Indebtedness of the Company has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes then outstanding.
ACQUISITION AND DEVELOPMENT OF ADDITIONAL CLUBS; RISKS OF CONSTRUCTION DELAYS
Part of the Company's growth strategy is dependent upon the Company's
ability to acquire, develop, own and operate additional fitness clubs in
selected locations in and adjacent to large metropolitan areas within the
Northeast and Mid-Atlantic regions of the United States. The successful
acquisition and development of new fitness clubs will depend on various factors,
including the availability of suitable sites for fitness clubs, the ability of
the Company to negotiate successfully lease and purchase contracts for new
fitness clubs and to meet construction schedules and budgets. As a result of the
foregoing, there can be no assurance that the Company will be able to acquire or
otherwise develop fitness clubs in areas into which it wishes to expand, or
otherwise execute its business strategies, and its ability to grow may be
adversely affected thereby. Even if the Company is able to expand its business,
there can be no assurance that such expansion will be profitable for the
Company.
PERFORMANCE OF RECENT OPENED CLUBS; ATTRACTION AND RETENTION OF MEMBERS.
The Company has opened 12 clubs between May 31, 1995 and August 31, 1997,
which have not yet achieved mature membership levels and have operated at a loss
or at a smaller profit margin than other clubs. The performance of these clubs
(and all other clubs operated by the Company) is dependent on the Company's
ability to attract and retain members and there can be no assurance that it will
be successful in these efforts, or that the membership levels at one or more of
its clubs will not decline. There are numerous factors that could lead to a
decline in membership levels or that could prevent the Company from increasing
its membership at newer clubs, including the public image of the clubs, the
ability of the clubs to deliver quality service at a competitive cost, the
presence of direct and indirect competition in the areas in which the clubs are
located, the public's interest in sports and fitness clubs and general economic
conditions.
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<PAGE>
GEOGRAPHIC CONCENTRATION
The Company owns and/or manages 27 fitness clubs and a physical therapy
facility in the New York metropolitan market, five fitness clubs in Washington,
D.C., two fitness clubs in Boston, and two fitness clubs in Switzerland. The
Company's geographic concentration in the Northeast and Mid-Atlantic regions and
in particular the New York metropolitan market may expose the Company to adverse
developments related to competition, economic and demographic changes.
DEPENDENCE ON NON-GUARANTOR SUBSIDIARIES
The Company has insufficient cash flow derived from its operations to
service its total indebtedness; and, therefore, the Company is dependent on the
operating cash flow of its subsidiaries. In addition, a majority of the
Company's assets are held at the subsidiary level. Because the Company's
subsidiaries have not guaranteed the payment of the principal and interest on
the Notes, the claims of Note Holders will be effectively subordinated to the
claims of creditors of the Company's subsidiaries, including trade credit.
HEALTH RISKS
Use of the Company's fitness clubs poses some potential health risks to
members or guests through exertion and use of the Company's services and
facilities including exercise equipment. There can be no assurance that a claim
against the Company for death or an injury suffered by members or their guests
while exercising at a club will not be asserted or that the Company would be
able to successfully defend any claim that might be asserted. The Company
currently maintains general liability coverage; however, there can be no
assurance that the Company will be able to maintain such liability insurance on
acceptable terms in the future or that such insurance will provide adequate
coverage against potential claims.
COMPETITION
The fitness club industry is fragmented and 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. There can be no assurance that the Company will be able to compete
effectively in the future in the markets in which it operates. New competitors,
which may include companies which are larger and have greater resources than the
Company, may enter these markets. Additionally, consolidation in the fitness
club industry could result in increased competition among participants,
particularly large multi-facility operators like the Company.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. The Company believes the loss of such key personnel could have a material
adverse effect on the Company and there can be no assurance that the Company can
attract and retain sufficient qualified personnel to meet its business needs.
Currently, the Company does not have any long-term employment agreements with
its executive officers. See "Management--Directors and Executive Officers."
GOVERNMENT REGULATION
The operations and business practices of the Company are subject to
regulations at federal, state and, in some cases, local levels. General rules
and regulations of the Federal Trade Commission (the "FTC")' and of state and
local consumer protection agencies, and state statutes apply to the Company's
advertising, sales and other trade practices, including the sale and collection
of memberships Although management is not aware of any proposed changes in any
statutes, rules or regulations, any changes could have a material
17
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adverse effect on the Company's financial condition and results of operations.
In addition, the provision of rehabilitation services is subject to government
regulation. See "Business--Government Regulation."
CONTROLLING SHAREHOLDERS
Bruckmann, Rosser, Sherrill & Co., L.P. ("BRS, L.P.") and Farallon Partners,
L.L.C. ("Farallon") own approximately 62% of the Common Stock of the Company and
collectively have the ability to elect a majority of the Board of Directors and
generally to control the affairs and policies of the Company. .
Circumstances may occur in which the interests of BRS, L.P. and Farallon, in
pursuing acquisitions or otherwise as shareholders of the Company, could be in
conflict with the interests of the holders of the Notes. See "Security
Ownership," "Certain Relationships and Related Transactions" and "Business--
Business Strategy."
LIMITATIONS ON CHANGE OF CONTROL
In the event of a Change of Control, the Company will be required to make an
offer for cash to purchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the purchase date. A Change
of Control will result in an event of default under the New Credit Facility and
may result in a default under other indebtedness of the Company that may be
incurred in the future. The New Credit Facility will prohibit the purchase of
outstanding Notes prior to repayment of the borrowings under the New Credit
Facility and any exercise by the holders of the Notes of their right to require
the Company to repurchase the Notes will cause an event of default under the New
Credit Facility. Finally, there can be no assurance that the Company will have
the financial resources necessary to repurchase the Notes upon a Change of
Control. See "Description of Notes--Change of Control."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFER
Prior to the Exchange Offer, there has not been any public market for the
Notes. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchange for New Notes by holders who are entitled to participate in this
Exchange Offer. The holders of old Notes (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who are not eligible to participate in the Exchange Offer are entitled to
certain registration rights, and the Company is required to file a Shelf
Registration Statement with respect to such Notes. The New Notes will constitute
a new issue of securities with no established trading market. The Company does
not intend to list the New Notes on any national securities exchange or to seek
the admission thereof to trading in the National Association of Securities
Dealers Automated Quotation System. The Initial Purchaser has advised the
Company that it currently intends to make a market in the New Notes, but it is
not obligated to do so and may discontinue such market making at any time. In
addition, such market making activity will be subject to the limits imposed by
the Securities Act and the Exchange Act and may be limited during the Exchange
Offer and the pendency of the Shelf Registration Statements. Accordingly, no
assurance can be given that an active public market or other market will develop
for the New Notes or as to the liquidity of the trading market for the New
Notes. If a trading market does not develop or is not maintained, holders of the
New Notes may experience difficulty in reselling the New Notes or may be unable
to sell them at all. If a market for the New Notes develops, any such market may
be discontinued at any time.
If a public trading market develops for the New Notes, future trading prices
of the New Notes will depend on many factors, including, among other things,
prevailing interest rates, the Company's operating results and the market for
similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount from their principal amount.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
in particular, the likelihood of the Company's success in developing and
expanding its business. These statements are based upon a number of assumptions
and estimates which are inherently subject to significant uncertainties and
contingencies, many of which are beyond the control of the Company, and reflect
future business decisions which are subject to change. The foregoing description
of risk factors specifies the principal contingencies and uncertainties to which
the Company believes it is subject. Some of these assumptions inevitably will
not materialize, and unanticipated events will occur which will affect the
Company's results.
EXCHANGE OFFER PROCEDURES
Issuance of New Notes in exchange for the Old Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Company of the Old Notes,
a properly completed and duly executed Letter of Transmittal and all other
required documents. Therefore, holders of the Old Notes desiring to tender such
Notes in exchange for New Notes should allow sufficient time to ensure timely
delivery. The Company is under no duty to give notification of defects or
irregularities with respect to the tenders of Notes for exchange. Notes that are
not tendered or are tendered but not accepted will, following the consummation
of the Exchange Offer, continue to be subject to the existing restrictions upon
transfer thereof and, upon consummation of the Exchange Offer, certain
registration rights under the Registration Rights Agreement will terminate. In
addition, any holder of Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transactions. Each Participating Broker-Dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the New Notes. See
"Plan of Distribution." To the extent that Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Notes could be adversely affected. See "The Exchange Offer."
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. The Company will not
receive any cash proceeds from the issuance of the New Notes in the Exchange
Offer. The net proceeds of the Initial Offering (after deducting the discount to
the Initial Purchaser and expenses in connection with the Initial Offering and
certain related transactions) were approximately $81.7 million. Such proceeds
were used as follows: (i) $34.0 million was used by the Company to repay all
outstanding obligations under the Credit Agreement dated as of December 10, 1996
by and among TSI, Bankers Trust Company and the lending institutions from time
to time a party thereto (the "Credit Agreement"); and (ii) $7.5 million was used
to prepay all outstanding obligations under the Subordinated Loan Agreement
dated as of December 10, 1996 between TSI and Canterbury Mezzanine Capital, L.P.
The remainder of the proceeds was retained by the Company for general corporate
purposes, including to fund expansion of the club base.
Concurrently with the Initial Offering, the Company entered into a new
credit facility with a group of lenders (the "New Credit Facility"), which
provides for a $15.0 million revolving credit facility with a scheduled maturity
date of October 15, 2002. See "Description of New Credit Facility."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
August 31, 1997 and as adjusted to give effect to the Offering and the
application of the proceeds therefrom. This table should be read in conjunction
with the financial statements, and the related notes thereto, included elsewhere
herein. See "Use of Proceeds," "Selected Historical Consolidated Financial Data"
and "Security Ownership."
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1997
----------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
--------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................................................. $ 702 $ 43,402
--------- -----------
--------- -----------
Long-term debt (including current installments):
Borrowings under the Existing Credit Agreement.......................................... $ 31,500 $ --
Borrowings under the New Credit Facility(1)............................................. -- --
Notes offered hereby.................................................................... -- 85,000
Capitalized lease obligations........................................................... 2,255 2,255
Notes payable........................................................................... 2,763 2,763
Borrowings under the Subordinated Loan Agreement(2)..................................... 7,387 --
--------- -----------
Total long-term debt.................................................................. 43,905 90,018
Total stockholders' deficit........................................................... (6,265) (6,937)(3)
--------- -----------
Total capitalization...................................................................... $ 37,640 $ 83,081
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Represents a commitment of up to $15.0 million under the New Credit
Facility, utilized only to the extent of outstanding standby letters of
credit of $1.1 million.
(2) Shown net of unamortized original issue discount of $0.1 million.
(3) Reflects the write-off of unamortized original issue discount of $0.1
million and deferred financing costs of $1.1 million relating to debt being
repaid with the net proceeds of the Offering, net of income tax benefit.
20
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Set forth below are selected historical consolidated financial data and
other financial data of the Company as of the dates and for the periods
presented. The selected historical consolidated financial data as of May 31,
1993, 1994, 1995, 1996 and 1997 and for the fiscal years then ended were derived
from the audited Consolidated Financial Statements of the Company. The selected
historical consolidated financial data as of August 31, 1997 and 1996 and for
each of the three month periods then ended were derived from the unaudited
Consolidated Interim Financial Statements of the Company for such periods,
which, in the opinion of Management, reflect all normal and recurring
adjustments necessary to present fairly the financial position and results of
operations of the unaudited periods. 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 Financial
Statements and accompanying notes thereto appearing elsewhere in this
registration statement.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Summary Statement of
Operations Data
Revenues................................ $ 21,935 $ 24,890 $ 33,349 $ 43,755 $ 56,567 $ 12,375 $ 17,198
Operating expenses
Payroll and related................... 10,073 10,799 16,105 18,626 23,321 5,220 7,035
Compensation expense in connection
with stock options.................. -- -- 635 1,967 5,933 450 160
Club operating expenses............... 6,406 8,115 11,740 14,542 18,044 3,651 5,230
General and Administrative............ 1,807 2,359 3,321 3,562 3,774 1,023 1,064
Depreciation and Amortization......... 1,285 1,514 2,168 2,929 4,219 889 1,589
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)................. 2,364 2,103 (620) 2,129 1,276 1,142 2,120
Interest expense, net................... 356 342 654 952 2,455 184 1,144
Income tax (benefit) provision.......... 882 824 (541) 628 (243) 475 450
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)....................... $ 1,126 $ 937 $ (733) $ 549 $ (936) $ 483 $ 526
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Balance Sheet Data
Total assets............................ $ 12,177 $ 18,421 $ 27,275 $ 34,805 $ 52,819 $ 35,665 $ 55,874
Long-term debt, including
current installments.................. 7,098 10,205 10,430 10,453 41,071 10,622 43,905
Stockholders' equity
(accumulated deficit)................. 1,408 2,343 1,986 5,474 (6,951) 5,895 (6,265)
Other Financial and Operational Data
Adjusted EBITDA(1)...................... $ 4,068 $ 4,635 $ 3,415 $ 8,302 $ 13,048 $ 2,756 $ 4,355
Adjusted EBITDA margin.................. 18.5% 18.6% 10.2% 19.0% 23.1% 22.3% 25.3%
Net cash provided by operating
activities............................ $ 1,866 $ 3,066 $ 3,283 $ 5,695 $ 12,009 $ 485 $ 819
Net cash used in investing activities... (1,959) (5,875) (7,673) (5,487) (13,278) (1,201) (3,473)
Net cash provided by (used in) financing
activities............................ (26) 2,910 4,244 144 2,809 278 888
Deferred lease expense(2)............... 419 1,017 1,232 1,277 1,620 275 486
Capital expenditures.................... 1,798 5,648 7,670 5,380 11,110 1,187 1,303
Wholly owned clubs operated at end of
period(3)............................. 12 16 20 23 28 23 31
Total clubs operated at end of
period(4)............................. 20 24 25 28 35 28 36
Members at end of period(5)............. 28,000 33,000 45,600 55,500 70,500 55,600 80,500
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MAY 31, AUGUST 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio (Deficiency) of earnings to fixed
charges(6)............................ 2.3x 1.7x $ (1,516) 1.3x $ (1,345) 2.1x 1.4x
</TABLE>
- ------------------------
(1) Adjusted EBITDA is defined as earnings before interest, taxes, depreciation
and amortization, deferred lease expense and compensation expense in
connection with stock options. Adjusted EBITDA is presented because
management believes it provides useful information regarding a company's
ability to incur and/or service debt. Adjusted EBITDA should not be
considered in isolation or as a substitute for net income, cash flows, or
other consolidated income or cash flow data prepared in accordance with GAAP
(as defined) or as a measure of a Company's profitability or liquidity.
Additionally, investors should be aware that Adjusted EBITDA may not be
comparable to similarly titled measures presented by other companies.
(2) Deferred lease expense reflects the difference between accrued rent expense
in accordance with GAAP and cash rent expense, which difference is typically
positive in the early years of a lease and negative in the later years of a
lease.
(3) During fiscal 1997, the Company opened or acquired six clubs and merged the
operations and membership of an existing wholly-owned club into one of the
newly opened clubs, which resulted in a net increase of five wholly-owned
clubs.
(4) Includes all clubs whether wholly-owned or managed.
(5) Represents members at wholly-owned clubs only.
(6) For the purpose of determining the ratio of earnings to fixed charges,
"earnings" consist of income before provision for corporate income taxes and
fixed charges. "Fixed charges" consist of interest expense, which includes
the amortization of deferred debt issuance costs and the interest portion of
the Company's rent expense (assumed to be one third of rent expense).
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Historical Consolidated Financial Data," and the Financial Statements of the
Company and the notes thereto included elsewhere in this Registration Statement.
This Registration Statement contains, in addition to historical information,
forward-looking statements that include risks and uncertainties. The Company's
actual results may differ materially from those anticipated in these
forward-looking statements. The following discussion makes reference to Adjusted
EBITDA which is defined as earnings before interest, taxes, depreciation and
amortization, deferred lease expense and compensation expense in connection with
stock options. Investors should be aware that the items excluded from the
calculation of Adjusted EBITDA, such as depreciation and amortization, are
significant components in an accurate assessment of the Company's financial
performance. Adjusted EBITDA is presented because management believes it
provides useful information regarding a company's ability to incur and/or
service debt. Adjusted EBITDA should not be considered in isolation or as a
substitute for net income, cash flows, or other consolidated income or cash flow
data prepared in accordance with GAAP (as defined) or as a measure of a
company's profitability or liquidity. Additionally, investors should be aware
that Adjusted EBITDA may not be comparable to similarly titled measures
presented by other companies.
OVERVIEW
The Company's revenues are principally a function of the number of clubs in
service and the number of total members. As of August 31, 1997, the Company
operated 36 clubs, of which 29 were wholly-owned and consolidated for reporting
purposes. The Company's clubs collectively served in excess of 90,000 members,
of which 80,500 were members at wholly-owned and consolidated clubs. The Company
generates approximately 81% of its revenues from membership dues and
approximately 7% of its revenues from one-time initiation fees. In no event are
revenues recognized before receipt of the underlying cash payment. Initiation
fees, which are paid at the inception of a membership contract, are recognized
on a pro rata basis over the estimated period of the membership (currently 24
months). Initiation fees are matched against sales commissions and other
expenses incurred in deriving the new membership sale. Monthly dues and
non-membership revenues are recognized on a pro-rata basis over the period in
which the services are provided. The Company believes its emphasis on affordable
monthly dues and use of EFT provides the Company with stable and predictable
cash flows and makes the Company less dependent on new membership sales than
certain of its competitors.
The Company's operating and selling expenses are comprised of both fixed and
variable costs. The fixed costs tend to include salary expense, rent, utilities,
janitorial expenses and depreciation. Variable costs are primarily related to
sales commission, 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.
During the last several years, the Company has substantially increased
revenues and profitability by expanding its club base in the New York,
Washington, D.C. and Boston metropolitan areas. As a result of the Company's
expanding club base and the relatively fixed nature of the Company's operating
costs, the Company's Adjusted EBITDA has increased from $3.4 million in fiscal
1995 to $14.6 million for the twelve-month period ended August 31, 1997 and
Adjusted EBITDA as a percentage of revenues has increased from 10.2% to 23.9%
over the same period. At the same time, the net loss for the Company increased
from $0.7 million for the year ended May 31, 1995 to $0.9 million for the twelve
months ended August 31, 1997 principally due to the increased non-cash charges
such as compensation expense in connection with stock options and depreciation
and amortization expense as well as increased interest expense net of the
respective tax effect.
23
<PAGE>
Management expects the strong growth in revenues, Adjusted EBITDA and net
income to continue as the 12 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 increases in revenues during its first
three years of operation as it reaches maturity. Because there is relatively
little incremental cost associated with such increasing revenues, there is a
greater proportionate increase in profitability. In the aggregate, the 12 clubs
opened or acquired since the beginning of fiscal 1996 generated revenue,
Adjusted EBITDA (before corporate expenses), and operating income (before
corporate expenses) of $14.0 million, $3.0 million and $0.1 million,
respectively, in the last twelve months ended August 31, 1997. The Company
believes that the revenues, Adjusted EBITDA (before corporate expenses), and
operating income (before corporate expenses) of these 12 clubs will increase
significantly as the clubs reach maturity.
In addition, management seeks to strengthen the Company's market position in
the Northeast and Mid-Atlantic regions and increase revenues and cash flow
through the opening of new clubs and the acquisition of existing clubs. As of
August 31, 1997, the Company had identified over 30 locations in its targeted
markets which it believes possess the criteria for a model club. Because of the
Company's historical success with opening new clubs and the number of
opportunities currently available to increase the club base, the Company intends
to open or acquire approximately 15 clubs by the end of fiscal 1999.
RESULTS OF OPERATIONS
GENERAL
Substantially all of the Company's members join on a month-to-month basis,
and, therefore, may cancel their memberships at any time with 30 days notice.
The Company estimates that the average length of a club membership is
approximately twenty four (24) months, based upon historical information
gathered from an examination of membership attrition at all of the Company's
mature clubs (I.E., clubs opened prior to fiscal year 1995). Although the
Company offers a variety of membership plans to its members, there has been no
material change in the percentage of memberships applicable to any given plan,
and thus, results of operations have not been impacted by changes in the mix of
the various types of membership plans.
THREE MONTHS ENDED AUGUST 31, 1997 COMPARED TO THREE MONTHS ENDED AUGUST 31,
1996
REVENUES. Revenues increased $4.8 million, or 39%, to $17.2 million for the
quarter ended August 31, 1997 from $12.4 million in the quarter ended August 31,
1996. This increase resulted primarily from the continued maturation of the
three clubs opened or acquired in fiscal 1996 (approximately $0.9 million, of
which $0.8 million was related to membership growth and $0.1 million was related
to dues and ancillary revenue increases), the six clubs opened or acquired in
fiscal 1997 (approximately $2.3 million, of which $2.0 million was related to
membership growth and $0.3 million was related to dues and ancillary revenue
increases), and the three clubs acquired in fiscal 1998 (approximately $0.7
million related to membership growth). In addition, revenues increased during
the quarter ended August 31, 1997 due to revenue growth at the Company's mature
clubs resulting from membership growth (approximately $0.8 million) as well as
increased sales of personal services such as private training (approximately
$0.1 million).
OPERATING EXPENSES. Operating expenses increased $3.8 million, or 34%, to
$15.1 million for the quarter ended August 31, 1997 from $11.2 million in the
quarter ended August 31, 1996. The increase in total operating expenses resulted
primarily from increases in: payroll and related expenses ($1.8 million); club
operating expenses ($1.6 million); and depreciation and amortization ($0.7
million). This increase was primarily attributable to the six clubs opened or
acquired in fiscal 1997 (approximately $2.2 million) and the three clubs
acquired in 1998 (approximately $1.5 million). In addition, general and
administrative expenses were unchanged at approximately $1.0 million for the
quarters ended August 31, 1997 and August 31, 1996.
24
<PAGE>
OPERATING INCOME (LOSS). Operating income (loss) increased $1.0 million, or
86%, to $2.1 million for the quarter ended August 31, 1997 from $1.1 million in
the quarter ended August 31, 1996. Operating income (loss) as a percentage of
revenues increased from 9% in the quarter ended August 31, 1996 to 12% in the
quarter ended August 31, 1997. The increase in operating income and operating
income as a percentage of revenues during the quarter ended August 31, 1997 is
primarily attributable to revenue growth at the 12 clubs opened or acquired
since fiscal 1995.
INTEREST EXPENSE, NET. Interest expense, net, increased $1.0 million to
$1.1 million for the quarter ended August 31, 1997 from $0.2 million in the
quarter ended August 31, 1996, primarily as a result of the Merger during the
1997 fiscal year and the new debt financing structure put in place. The Company
expects interest expense on an annualized basis to continue to increase due to
the issuance of Notes and any additional borrowings under the New Credit
Facility. (See "Description of New Credit Facility" beginning on page 46.) The
Company does not expect to incur additional long term indebtedness other than
through the Notes and the New Credit Facility, and if applicable, seller finance
at terms acceptable to the Company. Projected interest expense for the fiscal
year 1998 is $8.9 million.
INCOME TAX (BENEFIT) PROVISION. Income tax (benefit) provision remained
unchanged at $0.5 million for the quarters ended August 31, 1997 and 1996.
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues increased $12.8 million, or 29%, to $56.6 million during
fiscal 1997 from $43.8 million in fiscal 1996. This increase resulted primarily
from the continued maturation of four clubs opened or acquired during fiscal
1995 (approximately $2.4 million, of which $2.0 million was related to
membership growth and $0.4 million was related to dues and ancillary revenue
increases), the three clubs opened or acquired in fiscal 1996 (approximately
$3.6 million, of which $3.4 million was related to membership growth and $0.2
million was related to dues and ancillary revenue increases), and the six clubs
opened or acquired in fiscal 1997 (approximately $3.9 million, of which $3.4
million was related to membership growth and $0.5 million was related to dues
and ancillary revenue increases). In addition, revenues increased during fiscal
1997 due to revenue growth at the Company's mature clubs resulting from
membership growth (approximately $2.4 million) as well as increased sales of
personal services such as private training (approximately $0.5 million).
OPERATING EXPENSES. Operating expenses increased $13.7 million, or 33%, to
$55.3 million in fiscal 1997 from $41.6 million in fiscal 1996. The increase in
total operating expenses resulted primarily from increases in: payroll and
related expenses ($4.7 million); compensation expense in connection with stock
options ($4.0 million); club operating expenses ($3.5 million); and depreciation
and amortization ($1.3 million). The increase in payroll and related club
operating expenses is primarily attributable to the three clubs opened or
acquired in fiscal 1996 (approximately $2.7 million), and the six clubs opened
or acquired in fiscal 1997 (approximately $5.4 million). The increase in
compensation expense in connection with stock options is attributable to the
adjustment of the Company's stock options to fair market value in connection
with the Merger. In addition, general and administrative expenses increased $0.2
million to $3.8 million in fiscal 1997 from $3.6 million in fiscal 1996.
OPERATING INCOME (LOSS). Operating income (loss) decreased $0.9 million to
$1.3 million in fiscal 1997 from $2.1 million in fiscal 1996. Operating income
as a percentage of sales decreased from 5% in fiscal 1996 to 2% in fiscal 1997.
The decrease in operating income (loss) and operating income as a percentage of
sales during fiscal 1997 is attributable to the above-mentioned increase in
compensation expense in connection with stock options, which was partially
offset by improved operating results at the Company's clubs.
25
<PAGE>
INTEREST EXPENSE, NET. Interest expense, net, increased $1.5 million to
$2.5 million in fiscal 1997 from $1.0 million in fiscal 1996, primarily as a
result of the Merger during fiscal 1997 and the debt incurred to finance the
Merger.
INCOME TAX (BENEFIT) PROVISION. Income tax (benefit) provision decreased
$0.9 million to ($0.2) million in fiscal 1997 from $0.6 million in fiscal 1996,
as a result of the net 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 partly offset by a reduction in the
valuation allowance for the deferred tax assets.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues increased $10.4 million, or 31%, to $43.8 million during
fiscal 1996 from $33.3 million in fiscal 1995. This increase resulted primarily
from the continued maturation of four clubs opened during fiscal 1994
(approximately $2.8 million, of which $2.6 million was related to membership
growth and $0.2 million was related to dues and ancillary revenue increases),
the four clubs opened or acquired in fiscal 1995 (approximately $4.8 million, of
which $4.4 million was related to membership growth and $0.4 million was related
to dues and ancillary revenue increases), and the three clubs opened or acquired
in fiscal 1996 (approximately $1.3 million related to membership growth). In
addition, revenues increased during fiscal 1996 due to revenue growth at the
Company's mature clubs resulting from membership growth (approximately $1.3
million) and increased sales of personal services such as private training
(approximately $0.2 million).
OPERATING EXPENSES. Operating expenses increased $7.7 million, or 23%, to
$41.6 million in fiscal 1996 from $34.0 million in fiscal 1995. The increase in
total operating expenses resulted primarily from increases in: payroll and
related expenses ($2.5 million); compensation expense in connection with stock
options ($1.3 million); club operating expenses ($2.8 million); and depreciation
and amortization expense ($0.8 million). The increase in payroll and related and
club operating expenses is primarily attributable to the four clubs opened
during fiscal 1994 (approximately $0.8 million), the four clubs opened or
acquired during fiscal 1995 (approximately $2.9 million) and the three clubs
opened or acquired in fiscal 1996 (approximately $1.8 million). The increase in
compensation expense in connection with stock options is attributable to the
adjustment of the Company's stock options to fair market value. In addition,
general and administrative expenses increased $0.2 million to $3.6 million in
fiscal 1996 from $3.3 million in fiscal 1995.
OPERATING INCOME (LOSS). Operating income (loss) increased $2.7 million to
$2.1 million in fiscal 1996 from ($0.6) million in fiscal 1995. The increase in
operating income (loss) is primarily attributable to the increased revenues
associated with the seven new clubs opened since fiscal 1995. In addition,
operating income (loss) in fiscal 1995 was adversely affected by the opening of
four new clubs during the fourth quarter of fiscal 1994 and two clubs in fiscal
1995. The Company's clubs typically experience significant increases in revenues
and cash flow/profitability during the first three years of operations as they
mature. Because there are usually minimal incremental operating expenses
associated with such increased revenues, once break even is reached there is a
larger proportionate increase in profitability. Due to the fixed cost nature of
its operation, however, the Company's typical club takes six to nine months to
generate positive operating income.
INTEREST EXPENSE, NET. Interest expense, net increased $0.3 million to $1.0
million in fiscal 1997 from $0.7 million in fiscal 1996, primarily to finance
capital expenditures for new clubs opened or acquired in fiscal 1996.
INCOME TAX (BENEFIT) PROVISION. Income tax (benefit) provision increased
$1.2 million to $0.6 million in fiscal 1996 from ($0.5) million in fiscal 1995,
primarily as a result of the move to profitability in fiscal 1996.
26
<PAGE>
In fiscal 1996, the company's effective tax rate was negatively affected by net
operating losses incurred by certain clubs located in the states in which the
losses could not currently be utilized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are for capital expenditures, debt service
and working capital. The Company has financed its capital expenditures, debt
service requirements, and working capital primarily through internally generated
cash flow and borrowings under its Existing Credit Agreement together with
capital leases and other notes payable. See "Description of New Credit Facility"
beginning on page 46.
Net cash provided by operating activities in the three month period ended
August 31, 1997 was $0.8 million as compared with $0.5 million provided by
operating activities in the three month period ended August 31, 1996. Net cash
provided by operating activities for the fiscal year ended May 31, 1997 was
$12.0 million as compared with $5.7 million provided by operating activities for
the fiscal year ended May 31, 1996. The increase primarily reflects continued
maturation of recently opened facilities. Net cash provided by operating
activities for the fiscal year ended May 31, 1996 was $5.7 million as compared
with $3.3 million provided by operating activities for the fiscal year ended May
31, 1995. The increase primarily reflects continued maturation of recently
opened facilities.
The Company invested $7.7 million, $5.4 million and $11.1 million in capital
expenditures during fiscal years 1995, 1996 and 1997, and $1.3 million during
the three months ended the August 31, 1997. The Company estimates that it will
invest a total of approximately $13.0 million in capital expenditures during the
balance of fiscal 1998 and approximately $16.5 million in capital expenditures
during fiscal 1999 to open or acquire approximately 15 new clubs. It is
estimated that a further $2.0 million will be expended during the balance of
fiscal 1998 and $3.5 million during fiscal 1999 to upgrade and maintain existing
clubs.
The Company incurred significant indebtedness in connection with the Merger.
At August 31, 1997, on a pro forma basis, after giving effect to the issuance of
the Notes offered hereby, the Company would have had approximately $90.0 million
of outstanding indebtedness, consisting of $85.0 million of the Notes and $5.0
million in capitalized leases and notes payable. The New Credit Facility and the
Indenture impose certain restrictions on the Company, including restrictions on
its ability to incur indebtedness, pay dividends, make investments, grant liens,
sell its assets and engage in certain other activities. The Company believes
that cash generated from operations, together with the excess cash generated
from the net proceeds of the Offering and amounts available under the New Credit
Facility, will be adequate to meet its capital expenditures, debt service
requirements, and working capital needs for the foreseeable future. The Company
will have approximately $13.9 million in availability under the New Credit
Facility. The New Credit Facility will mature on October 15, 2002 and has no
scheduled interim amortization requirements. The Company's future operating
performance and ability to service or refinance the Notes and to extend or
refinance the New Credit Facility will be subject to future economic conditions
generally and to financial, business and other factors, many of which are beyond
the Company's control. See "Description of New Credit Facility" beginning on
page 46.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended May 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 will require the Company to replace the current presentation of the
per share data with "basic" and "diluted" per share. SFAS No. 128 will be
adopted by the Company for periods ending after May 31, 1998, and for all
periods presented the Company will provide "basic" and "diluted" per share data.
Based on management's current estimates, the future adoption of SFAS 128 is not
expected to have a material impact on per share data.
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BUSINESS
The following discussion makes reference to Adjusted EBITDA which is defined
as earnings before interest, taxes, depreciation and amortization, deferred
lease expense and compensation expense in connection with stock options.
Investors should be aware that the items excluded from Adjusted EBITDA, such as
depreciation and amortization, are significant components in an accurate
assessment of the Company's financial performance. Adjusted EBITDA is presented
because management believes it provides useful information regarding a company's
ability to incur and/or service debt. Adjusted EBITDA should not be considered
in isolation or as a substitute for net income, cash flows, or other
consolidated income or cash flow data prepared in accordance with GAAP (as
defined) or as a measure of a company's profitability or liquidity.
Additionally, investors should be aware that Adjusted EBITDA may not be
comparable to similarly titled measures presented by other companies.
GENERAL
The Company is a leading owner and operator of fitness clubs in the
Northeast and Mid-Atlantic regions of the United States and the largest operator
of fitness clubs in Manhattan. As of August 31, 1997, the Company operated 36
clubs which collectively serve in excess of 90,000 members. The Company's
largest presence is in the New York metropolitan area, where it operates 27
clubs under the tradename "New York Sports Clubs" that collectively serve over
75,000 members. The Company also has a strong presence in the Washington, D.C.
metropolitan area with five clubs operating under the tradename "Washington
Sports Clubs" and has expanded its operations to include the Boston metropolitan
market where it has two clubs. The Company has experienced significant growth
over the past several years through a combination of developing new "greenfield"
club locations and acquiring existing clubs. From May 31, 1995 to August 31,
1997, the Company's club base has grown from 25 clubs to 36 clubs. Over the same
period, the Company's revenues and Adjusted EBITDA (as defined) have increased
from $33.3 million and $3.4 million, respectively, for the year ended May 31,
1995, to $61.4 million and $14.6 million, respectively, for the twelve months
ended August 31, 1997. At the same time, the net loss for the Company increased
from $0.7 million for the year ended May 31, 1995 to $0.9 million for the twelve
months ended August 31, 1997 principally due to increased non-cash charges such
as compensation expense in connection with stock options and depreciation and
amortization expense as well as increased interest expense net of the respective
tax effect.
The Company's clubs are conveniently located, reasonably priced,
state-of-the-art fitness facilities. The Company employs a regional clustering
strategy providing members access to clubs near both their work and home for a
single membership fee. This strategy allows the Company to maximize revenues by
charging members slightly higher monthly dues for the ability to use more than
one club in the chain and to attract and retain members by offering greater
convenience and a broader range of facilities and services than its smaller
competitors. The Company's regional clustering strategy also allows the Company
to achieve economies of scale with regard to sales, marketing, purchasing and
corporate administrative expenses. In addition, the Company's emphasis on
monthly dues and use of its electronic funds transfer system allows the Company
to generate stable and predictable cash flows and makes the Company less
dependent on new membership sales and price discounting than certain of its
competitors.
Over its 24 year operating history, the Company has developed and refined a
model club format that allows the Company to cost effectively construct and more
efficiently operate its fitness clubs. The Company's model club is 15,000 to
25,000 square feet and features a wide variety of state-of-the-art
cardiovascular and strength-training equipment, as well as exercise studios
offering extensive group fitness programs. Certain clubs also feature additional
amenities, including swimming pools, squash or tennis courts and physical
therapy centers. The Company offers members a variety of other services for
which it receives additional fees, including personal training. The Company's
typical member is 20 to 44 years of age, college educated and earns in excess of
$50,000 per annum.
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INDUSTRY OVERVIEW
According to the International Health, Racquet & Sportsclub Association
("IHRSA"), the industry's leading trade organization, revenues generated by the
United States fitness club industry increased at a compound annual rate of 9.4%
from $5.5 billion in 1991 to $8.6 billion in 1996. Over the same period,
memberships in all clubs have grown at a 4.5% compound annual growth rate, from
16.7 million to 20.8 million. Both fitness club revenues and memberships have
benefited from the increasing awareness among the general public of the
importance of physical exercise. In July 1996, the Surgeon General issued a
report on Physical Activity and Health highlighting the connection between
regular physical exercise and better health. The Company believes the Surgeon
General's report and other medical evidence supporting the importance of regular
physical exercise are leading more Americans to become increasingly health
conscious and to regularly incorporate exercise into their lives.
The fitness club industry in the United States is highly fragmented.
According to IHRSA, there were more than 13,000 commercial fitness clubs in
operation during 1996. According to Club Industry magazine, however, the ten
largest companies in the industry account only for approximately 15% of all
industry revenue and own less than 10% of all clubs. The Company believes that
independent operators have found it increasingly difficult to compete with
multi-facility operators like the Company that enjoy substantial economies of
scale. Management believes the long-term trend of increasing fitness awareness
and the fragmented nature of the industry make it attractive for continued
investment.
COMPETITIVE STRENGTHS
The Company attributes its opportunities for continued growth and increased
profitability to the following competitive strengths:
STRONG MARKET POSITION. The Company believes it is among the five largest
fitness club operators in the United States, as measured by consolidated
revenues. The Company is the largest operator of fitness clubs in Manhattan with
20 clubs, making it more than twice as large as its nearest competitor. The
Company believes there are only four chains that own and operate more than ten
clubs in the Northeast and Mid-Atlantic markets, and the Company has the
opportunity to maintain, or establish, a leadership position in each of these
markets. The Company attributes its leadership position to the success of its
regional clustering strategy, the consistency of facilities and services
provided by its clubs, and the ability to continue to attract new members by
providing one of the most attractive price/value combinations available in its
markets.
SUCCESSFUL REGIONAL CLUSTERING STRATEGY. The Company believes its regional
clustering strategy allows it to maximize cash flows by providing higher
quality, conveniently located fitness facilities on a cost effective basis. By
operating a group of clubs in a concentrated geographic area, the value of
Company memberships is enhanced by the ability to offer memberships that allow
the member to use any of the Company's clubs at any time ("Passport
Membership"). This membership appeals primarily to consumers who seek the
convenience of having a fitness club near their home and their workplace.
Approximately 55% of all members choose the Passport Membership, and because
these memberships offer broader privileges and greater convenience, they
generate higher monthly dues than single club memberships. Regional clustering
also allows the Company to provide special facilities within the market without
offering them at each location (e.g., squash, tennis, special programs, and
swimming pools). The Company believes its regional clustering strategy allows it
to achieve economies of scale with regard to sales, marketing, purchasing and
corporate administrative expenses.
STABLE CASH FLOWS. The Company believes that its emphasis on affordable
monthly dues and its electronic funds transfer ("EFT") system allows it to
generate stable and predictable cash flows. The Company charges a modest
initiation fee ($115 on average) and monthly dues of $53-$76, depending on the
type of membership plan. The Company believes that its monthly dues structure
gives it a significant
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competitive advantage in terms of ease of sale and collection and revenue
collected per year and makes the Company less dependent on new membership sales,
and price discounting, than certain of its competitors. The Company also
believes its use of EFT, by which a member's credit card or bank account is
automatically debited for each month's dues, assures a more stable cash flow,
eliminates the traditional accounts receivable function and minimizes bad-debt
write-offs. Approximately 90% of the Company's members pay their monthly dues
through EFT, accounting for more than 70% of monthly revenues.
PROVEN UNIT OPERATING PERFORMANCE. The Company has established a track
record of consistent growth in revenue and cash flow across its club base. The
Company's 12 wholly-owned clubs in operation at the end of fiscal 1993 generated
revenues, Adjusted EBITDA (before corporate expenses) and operating income
(before corporate expenses) of $25.0 million, $8.9 million and $8.1 million,
respectively, during fiscal 1997 as compared to $20.0 million, $6.9 million and
$4.9 million, respectively, during fiscal 1993. In addition, over its 24-year
history, the Company has never closed a club.
EXPERIENCED MANAGEMENT TEAM. The Company believes that it possesses one of
the most experienced management teams in the industry. The Company's five senior
executives have over 60 years of combined experience in the fitness club
industry and 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. In the aggregate, management owns
approximately 28% of the capital stock of the Company, on a fully-diluted basis.
BUSINESS STRATEGY
The Company intends to significantly increase revenue and cash flow using
the following strategies:
MATURATION OF RECENTLY OPENED CLUBS. Since the beginning of fiscal 1996,
the Company has opened or acquired 12 clubs. Management believes that the
Company's recent financial performance does not yet fully reflect the benefit of
these new clubs. 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 there is relatively little incremental
cost associated with such increasing revenues, there is a greater proportionate
increase in profitability. In the aggregate, the 12 clubs opened or acquired
between May 31, 1995 and August 31, 1997 generated revenues, Adjusted EBITDA
(before corporate expenses) and operating income (before corporate expenses) of
$14.0 million, $3.0 million and $0.1 million, respectively, during the last
twelve months ended August 31, 1997. The Company believes that the revenues,
Adjusted EBITDA (before corporate expenses) and operating income (before
corporate expenses) of these 12 clubs will significantly increase as the clubs
reach maturity.
EXPANSION OF CLUB BASE. Management intends to strengthen the Company's
market position in the Northeast and Mid-Atlantic regions and increase revenues
and cash flow through the opening of new clubs and the acquisition of existing
clubs. Before opening or acquiring a new club, management undertakes a rigorous
process involving site selection, demographic and competitive analysis,
negotiation of lease and acquisition terms and financial modeling to ensure that
a location meets the Company's criteria for a model club. As of August 31, 1997,
the Company had identified over 30 locations in its targeted markets which it
believes possess the criteria for a model club. Because of the Company's
historical success with opening new clubs and the number of opportunities
currently available to increase the club base, the Company expects to open or
acquire approximately 15 clubs by the end of fiscal 1999.
INCREASED VALUE-ADDED SERVICES. In addition to the Company's regional
clustering strategy, the Company has recently focused on increasing the
additional services available to its members. These services, which include
personal training, generate incremental revenues with minimal capital investment
and assist in the process of attracting and retaining members. The increased
emphasis on these value-added services have contributed to the Company's growth,
as non-membership club revenues have
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increased from $2.4 million, or 7.2% of revenues in fiscal 1995, to $5.5
million, or 9.0% of revenues in the last twelve months ended August 31, 1997.
FACILITIES AND SERVICES
Approximately 30 of the Company's existing clubs are based on the Company's
model club format, which will serve as a basis for new clubs developed or
acquired by the Company. This model draws on the Company's historical experience
and has been refined through the operation and results of recently opened clubs.
However, because the Company typically builds new clubs in existing buildings
designed for office, retail or other uses (e.g., parking garage, nightclub, and
banking), its model club is tailored for each space.
The main characteristics of the prototype club include:
LOCATION: The Company's clubs are typically located in well-established,
higher-income residential, commercial or mixed urban neighborhoods within major
metropolitan areas capable of supporting the development of a cluster of clubs.
Clubs must have relatively high "retail" visibility and should be close to
transportation hubs.
CLUB SIZE: The Company's clubs range from 15,000 to 25,000 square feet. The
optimal size is determined based on expected membership size, peak member usage
at maturity and occupancy costs. Membership for each club ranges from 2,500 to
4,500 at maturity.
DEMOGRAPHICS: Although club members represent a cross-section of the
population in a given geographic market, the Company's typical member is between
the ages of 20 and 44, college educated and earns in excess of $50,000 per
annum.
FACILITIES/SERVICES: 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
Nautilus, Cybex, Icarian and Hammer Strength machines; group exercise and
cycling studio(s); Cardio-Theater entertainment systems; locker rooms, including
shower facilities, towel service, other amenities such as saunas and steamrooms;
and a small 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, child care, swimming
pools, tennis courts or squash courts, and climbing walls are available in
certain locations.
CAPITAL INVESTMENT: The initial development of a new club costs
approximately $100 per square foot. This includes all hard and soft construction
costs, fitness equipment, furniture and fixtures, and all other start-up costs.
In general, approximately 65% of the costs are for construction, 25% for fitness
equipment, furniture and fixtures, and the remainder for miscellaneous costs.
MEMBERSHIP PROGRAMS AND REVENUE COLLECTION
The Company offers three principal types of memberships:
(1) The Passport Membership is the Company's highest priced membership, and
it entitles the member to use any Company club at any time. This membership is
held by approximately 55% of current members.
(2) The Gold membership allows the member to use his/her "home" club at any
time, and to use other clubs at off-peak times only. This membership is held by
approximately 40% of current members.
(3) The Off-Peak membership, which is the least expensive category,
restricts use to off-peak times at any Company club. Five percent (5%) of the
Company's members hold this type of membership.
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To join a Company club, a new member signs a membership agreement which
obligates the member to pay the Club a one-time initiation fee and monthly dues.
The initiation fee averages $120 for the New York Sports Clubs and averages $55
for the other U.S. clubs. Club dues currently average approximately $70 per
month in the New York area clubs and $60 in other areas. The Company believes
that its monthly dues strategy gives it a significant competitive advantage in
terms of ease of sale and collection, revenue collected per year, and length of
membership. In addition, it enables the Company to increase its dues in an
efficient and consistent manner.
Approximately 90% of all memberships continue from month-to-month until the
member makes an affirmative decision to cancel the membership. Substantially all
of the Company's members join on a month-to-month basis, and, therefore, may
cancel their memberships with the Club at any time with 30 days notice. The
Company estimates that the average length of a club membership is approximately
twenty-four (24) months, based upon historical information gathered from an
examination of membership attrition at all mature clubs (I.E., clubs opened
prior to fiscal year 1995). The membership agreement provides that monthly dues
will be collected by EFT based on credit card or bank account debit
authorization contained in the agreement. The monthly dues and EFT system
assures a stable cash flow for the Company, eliminates the traditional accounts
receivable function, and minimizes bad-debt write-offs. During the first week of
each month the Company receives, on a consolidated basis, by wire transfer, the
dues for that month. In fiscal 1997, the Company collected average annual
revenue of approximately $890 per member, which typically places the membership
cost in the mid-price range for the markets served by the Company. Now exceeding
$4.2 million per month, the total EFT has increased by $1.9 million since May
31, 1995. While the Company strongly encourages monthly dues memberships,
approximately 10% of the Company's members (often corporate group members)
purchase paid-in-full defined term memberships of one year.
PHYSICAL THERAPY SERVICES
The Company operates a stand-alone physical therapy facility in New York
City on behalf of the Hospital for Joint Diseases, which is part of the New York
University Hospital Group (the "Hospital"). The Company was paid approximately
$0.9 million for these management services in fiscal year 1997, and expects to
be paid a similar amount in fiscal year 1998. Pursuant to the existing
management and other agreements between the Company and the Hospital, the
Company is responsible for all payroll and occupancy expenses of the facility,
as well as certain other expenses. The term of these agreements is currently
month-to-month, but the Company is renegotiating the agreements and expects to
extend the respective terms for at least two years.
Six of the Company's clubs offer physical therapy services on-site. These
services are provided by unaffiliated sub-tenants or licensees of the Company,
including Health South at one Manhattan location. The Company believes that
these facilities attract new club members and provide valuable services to
existing members.
MARKET AND MEMBERSHIP DEMOGRAPHICS
The Company's clubs are typically located in well-established, higher-income
residential, commercial or mixed urban areas with a significant population of
young (25 to 44 years of age) professionals. They are broadly positioned as
conveniently located clubs for men and women of all ages and levels of fitness,
offering mid-priced memberships for quality facilities, equipment, and programs.
Club members represent a cross-section of the population in a given geographic
market, but they are primarily individuals in the 20 to 44 year-old age group.
Approximately 60% of all members are above the age of thirty years and the
median age is approximately 35 years. The total membership is composed of
slightly more women than men (53% to 47%). A majority of members are college
educated, and have income in excess of $50,000 per year. The Company believes
that its typical member has incorporated fitness into his/her lifestyle.
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Despite the higher transient segment of the population that exists in the
urban markets served by the Company, the Company's overall cancellation rates
are in line with the Northeast U.S. industry average, based on IHRSA's Industry
Data Survey (1996). While the Company's cancellation rates at mature clubs vary
from month-to month and club-to-club, due to seasonality and other factors, they
tend to fluctuate in a predictable range of 3.5% to 4.0% per month. Newer clubs
have far lower rates. Cancellation rates generally increase as a club membership
base grows and then stabilizes as a club reaches maturity.
The Company believes that approximately 55% of cancellations result from
factors which are beyond its control, primarily member relocation, but also
medical and payment issues. The Company closely monitors and manages its member
attrition. Efforts to reduce member turnover are ongoing.
SALES AND MARKETING
The Company employs in excess of 95 "in-club" membership consultants whose
sole responsibility is the sale of club memberships. Most of the clubs have
street frontage and high visibility which attracts substantial retail traffic.
In addition, the clubs have significant advertising and market visibility as a
result of the Company's clustering strategy. The Company promotes the clubs
aggressively through television and print advertising, billboards, direct mail,
public relations campaigns, special events (e.g., as primary sponsor of a health
and fitness products and services exposition), and special offers such as
free-trial periods. In addition, the Company has developed three worldwide web
sites which describe all of the club facilities and locations and act as a
source for promotion on line. The Company's marketing and public relations
efforts are often supported by innovative fitness programs and products
developed by the Company. For example, the Company has an exclusive relationship
with the New York City Ballet for the co-development of class exercise programs
for club use.
The Company's experience has been that membership levels at new clubs
generally increase for a period of three years or more before reaching a
relatively stable level. The Company considers clubs which have reached this
level to be "mature" clubs. At mature clubs, referrals from existing club
members are a primary source of new members.
The Company also pursues an active corporate and group sales program. Given
heightened concern about health care costs, and the increased interest in
preventive health care on the part of businesses, insurance companies, health
maintenance organizations, and the government, the Company has placed increased
emphasis on its corporate sales efforts.
The clustering of clubs strengthens the Company's sales and marketing
efforts. By operating a group of clubs in a concentrated 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 (including clubs in
other areas) at any time. This membership appeals primarily to consumers who
seek the convenience of having a fitness club near their home and their
workplace. Approximately 55% of all members choose the Passport Membership, and
because these memberships offer broader privileges and greater convenience, they
are sold at a premium over single-club prices. Clustering also allows the
Company to provide special facilities within the market without offering them at
each location (e.g., squash, tennis, special programs, and swimming pools).
The Company believes that its approach of providing the best price/value
combination to a broad customer base enables the Company to generate
significantly higher revenue per square foot than the industry standard, while
also reducing the risks associated with targeting a narrow market. While IHRSA
statistics show that U.S. fitness-only clubs generate approximately $63 in
revenue per square foot, the Company's mature clubs generate two-to-three times
that amount.
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INFORMATION SYSTEMS
The Company believes it has been an industry leader in the use of computer
technology since it adopted the EFT system for monthly dues collection in the
mid-1980's. In August 1997, the Company collected revenue from over 70,000 bank
and credit card accounts belonging to members of its wholly-owned clubs. The
Company believes that it now has the third largest monthly revenue from EFT in
the fitness club industry.
The Company applies information technology in virtually every area of the
business, including business development, sales and marketing, staffing and
other operational systems. The Company has underway a multi-year information
technology project that has implemented, among other things, 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, as well as the associated sales compensation
system. Other elements of this project will include the development and
implementation of (a) a computerized photo and card-swipe system for member
check-in, (b) automated updates and changes to existing member records and (c)
extensive club site development databases, class exercise scheduling and payroll
system and personal training revenue tracking and payroll system, as part of a
larger fitness programming project. The Company believes that its information
management systems, which are proprietary in many respects, produce a
substantial competitive advantage.
The Company is currently upgrading its general accounting system to become
Year 2000 compliant, which includes ensuring that the Company's vendors are also
compliant to the extent non-compliance could have a material adverse effect on
Company operations. The Company expects to complete this process by the end of
fiscal year 1998.
MANAGED CLUBS
As of August 31, 1997, 31 of the existing clubs were wholly-owned by the
Company and five 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 approximately
50%. These amounts appear on the Company's income statements as management fees
or as share of net income in equity investments. However, the gross revenue
generated by the Managed Clubs (approximately $10.0 million per year) is not
consolidated for financial statement purposes.
The Company acquired two Managed Clubs during fiscal 1995 and two Managed
Clubs at the outset of fiscal 1998 which were originally party to a management
agreement with the Company. In the future, the Company may seek to acquire
Managed Clubs, if such opportunities arise.
COMPETITION
The Company is one of the largest fitness club operators in the country and
the largest in Manhattan measured by number of clubs. The Company believes its
clustering strategy results in its strong position in the New York and
Washington, D.C. markets. The Company's clubs compete with numerous regional and
local club operators, as well as with physical fitness and recreational
facilities established by governments and businesses for their employees,
amenity and condominium clubs, the YMCA and similar organization and to a
certain extent, racquet clubs and tennis and other athletic clubs, weight
reducing salons, and the home-use fitness equipment industry. Neither of the two
largest fitness club operators in the United States, Bally Total Fitness and
Fitness Holdings, have a significant presence in the Company's targeted market
segments. The Company estimates that as of August 31, 1997 there were more than
200 competitive clubs
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in the New York metropolitan market, 100 clubs in the Washington, D.C. market,
and 70 clubs in the Boston market. See "Risk Factors--Competition."
The Company 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. The Company 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 acquisitions.
INTELLECTUAL PROPERTY
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,
TSI, and Town Sports International, Inc.
EMPLOYEES
At August 31, 1997, the Company had approximately 2,100 employees, of which
approximately 680 were employed full-time. Approximately 90 employees were
corporate personnel working in the Manhattan or the Washington, D.C. 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. The Company believes
that it offers its employees benefits (including health, dental, disability,
life insurance and 401(k) plans) which are superior to those generally offered
by its competitors.
PROPERTIES AND FACILITIES
CLUB LOCATIONS. In the New York City and Washington, D.C. markets, the
Company has created clusters of clubs in the higher-income urban areas and their
commuter suburbs in accordance with the Company's operating strategy of offering
the consumer the convenience and value of multiple locations and reciprocal use
privileges and maximizing efficiencies through centralized management control of
standardized facilities and services.
CLUB LOCATIONS AS OF AUGUST 31, 1997
<TABLE>
<CAPTION>
FISCAL
YEAR
FIRST
LOCATION ADDRESS OWNERSHIP STRUCTURE OPERATED
- --------------------------------- ----------------------------------------- ------------------------ -----------
<S> <C> <C> <C>
1 Manhattan 404 Fifth Avenue at 37th Street Wholly Owned 1974
2 Manhattan 151 East 86th Street Wholly Owned 1976
3 Washington, DC 214 D Street, S.E. Part Owned/Managed 1979
4 Manhattan 61 West 62nd Street Wholly Owned 1985
5 Brooklyn, NY 110 Boerum Place Wholly Owned 1986
6 Manhattan 614 Second Avenue at 34th Street Wholly Owned 1986
7 Basel, Switzerland St. Johanns-Vorstadt 41 Managed 1987
8 Zurich, Switzerland Glarnischstrasse 35 Managed 1987
9 Great Neck, NY 15 Barstow Road Managed 1989
10 East Brunswick, NJ 8 Cornwall Court Wholly Owned 1990
11 Manhattan 30 Cliff Street Wholly Owned 1990
12 Manhattan 380 Madison Avenue at 46th Street Wholly Owned 1990
13 Manhattan 151 Reade Street Wholly Owned 1990
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
FISCAL
YEAR
FIRST
LOCATION ADDRESS OWNERSHIP STRUCTURE OPERATED
- --------------------------------- ----------------------------------------- ------------------------ -----------
<S> <C> <C> <C>
14 Washington, DC 1835 Connecticut Avenue, N.W. Part Owned/Managed 1990
15 Manhattan 1601 Broadway at 48th Street Wholly Owned 1992
16 Boston, MA 561 Boylston Street Wholly Owned 1992
17 Manhattan 50 West 34th Street Wholly Owned 1993
18 Washington, DC 1990 M Street, N.W. Wholly Owned 1993
19 Bethesda, MD 4903 Elm Street Wholly Owned 1994
20 Washington, DC 2251 Wisconsin Avenue, N.W. Wholly Owned 1994
21 Manhattan 349 East 76th Street Wholly Owned 1994
22 Manhattan 248 West 80th Street Wholly Owned 1994
23 Manhattan 502 Park Avenue at 59th Street Wholly Owned 1995
24 Manhattan 117 Seventh Avenue S. at 10th Street Wholly Owned 1995
25 Scarsdale, NY 696 White Plains Road Wholly Owned 1996
26 Manhattan 303 Park Avenue S. at 23rd Street Wholly Owned 1996
27 Manhattan 30 Wall Street Wholly Owned 1996
28 Manhattan 575 Lexington Avenue at 51st Street Wholly Owned 1997
29 Manhattan 278 Eighth Avenue at 23rd Street Wholly Owned 1997
30 Manhattan 1635 Third Avenue at 91st Street Wholly Owned 1997
31 Mamaroneck, NY 124 Palmer Avenue Wholly Owned 1997
32 Manhattan 200 Madison Avenue at 36th Street Wholly Owned 1997
33 Manhattan 131 East 31st Street at Lexington Avenue Wholly Owned 1997
34 Forest Hills, NY 69-33 Austin Street Wholly Owned 1997
35 Princeton, NJ 301 North Harrison Street Wholly Owned 1997
36 Allston, MA 15 Gorham Street Wholly Owned 1998
Under Construction
37 Manhattan 633 Third Avenue at 41st Street Wholly Owned 1998
38 North Bethesda, MD 10,400 Old Georgetown Road Wholly Owned 1998
</TABLE>
36
<PAGE>
TSI owns the 151 East 86th Street location, which houses a Company club and
a retail tenant that generated $0.5 million of rental income for the Company
during the fiscal year ended May 31, 1997. All other clubs occupy leased space
pursuant to long-term leases (generally 15 to 25 years, including options). In
the next seven fiscal years (ending May 31, 2004), only three of the Company's
leases will expire without any renewal option.
The Company leases approximately 15,000 square feet of office space in New
York City, and 3,000 square feet of office space in Washington, D.C., 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.
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 down
payment made. In addition, the Company's membership contracts provide that a
member may cancel his or her membership at any time for death, 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.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any of
the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of August 31, 1997, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark Smith........................................... 38 Chief Executive Officer and Director
Robert Giardina...................................... 39 President and Chief Operating Officer
Alexander Alimanestianu.............................. 38 Executive Vice President, Development
Richard Pyle......................................... 38 Executive Vice President and Chief Financial Officer
Deborah Smith........................................ 38 Senior Vice President--Operations
Leslie Kimerling..................................... 35 Senior Vice President--Information Management and
Planning
Keith Alessi......................................... 42 Director
Paul Arnold.......................................... 51 Director
Bruce Bruckmann...................................... 43 Director
Stephen Edwards...................................... 34 Director
Jason Fish........................................... 39 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 December 1996. Mr. Smith has had
primary responsibility for the development and/or acquisition of more than 25
new Company 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 4 clubs) after six years of 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 30 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 in 1992 and Executive
Vice President in 1995, successively. Before joining the Company, Mr. Pyle
worked in public accounting (in the U.S., Bermuda, Spain and in England)
specializing in the hospitality industry, and as the corporate controller for a
British public company in the leisure industry.
38
<PAGE>
DEBORAH SMITH joined the Company in 1985, 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, D.C. 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 Jackson Hewitt,
the second largest tax preparation service in the United States. 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 is president and CEO of Cort Business Services, a leading national
supplier of high end rental furniture.
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
Jitney Jungle Stores of America, Inc., Mohawk Industries, Inc., AmeriSource
Distribution Corporation, Chromcraft Revington Corporation, Cort Business
Services, 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 a director of several private
companies.
JASON M. 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.
("FCMLLC") and Farallon Partners, L.L.C., Farallon's two management entities,
since April 1996. He was a General Partner of the Farallon investment
partnerships and a Managing Director of FCMLLC's predecessor, Farallon Capital
Management, Inc., from 1990 to 1996.
COMPENSATION OF DIRECTORS
The Company may compensate directors for services provided in such capacity.
In addition to reimbursement for all reasonable out-of-pocket expenses in
connection with their travel, directors who are not executives of the Company or
officers of BRS or Farallon are paid $1,500 for each board meeting they attend
in person, $500 for each committee meeting they attend in person and $500 for
each telephonic meeting.
39
<PAGE>
SUMMARY COMPENSATION TABLE
The following summarizes, for the fiscal year indicated, the principal
components of compensation for the Company's Chief Executive Officer (the "CEO")
and the four highest compensated executive officers (collectively, the "named
executive officers"). The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------------ AWARDS
OTHER COMMON STOCK
ANNUAL UNDERLYING
FISCAL COMPENSATION OPTIONS/ SARS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) ($) (#)
- ----------------------------------------- ----------- ---------- ---------- ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
Mark Smith, Chief Executive Officer...... 1997 $ 350,000 $ 176,000 -- 8,830
Robert Giardina, President and Chief
Operating Officer...................... 1997 $ 331,948 $ 118,000 -- 8,829
Richard Pyle, Executive Vice President
and Chief Financial Officer............ 1997 $ 181,941 $ 85,000 -- 8,828
Alexander Alimanestianu, Executive Vice
President, Development................. 1997 $ 178,711 $ 85,000 -- 8,828
Deborah Smith, Senior Vice
President--Operations.................. 1997 $ 136,990 $ 63,475 -- 5,350
</TABLE>
- ------------------------
(1) Includes annual bonus payments under the Company's Annual Bonus Plan.
OPTION/SAR GRANTS DURING FISCAL 1997
The following discloses options on the Company's Class A Common Stock
granted during fiscal 1997 to the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE APPRECIATION
SECURITIES OPTIONS/ FOR OPTION TERM
UNDERLYING SARS ------------------------------
OPTIONS/ GRANTED TO 5%
SAR'S EMPLOYEES EXERCISE ANNUAL 10%
GRANTED (#) IN FISCAL OR BASE EXPIRATION GROWTH RATE ANNUAL GROWTH
NAME (1) YEAR (%) PRICE ($) DATE ($) RATE ($)
- -------------------------------------------- ------------- ----------- ----------- ----------- ------------- ---------------
Mark Smith.................................. 8,830 15.45 1.00 12-31-06 14,383 22,903
Robert Giardina............................. 8,829 15.45 1.00 12-31-06 14,382 22,900
Richard Pyle................................ 8,828 15.45 1.00 12-31-06 14,380 22,898
Alexander Alimanestianu..................... 8,828 15.45 1.00 12-31-06 14,380 22,898
Deborah Smith............................... 5,350 9.36 1.00 12-31-06 8,715 13,877
</TABLE>
- ------------------------
(1) All of such options were granted under the 1996 Common Stock Option Plan (as
defined). The options granted under the 1996 Common Stock Option Plan are
subject to vesting over five years subject to certain performance targets
and repurchase provisions upon termination of employment.
40
<PAGE>
Pursuant to the Merger, certain options on the Company's Common and
Preferred Stock were converted into new options on the Company's Series B
Preferred Stock. The following table sets forth the holdings of such options by
the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES EXERCISE OR POTENTIAL
UNDERLYING BASE PRICE EXPIRATION REALIZABLE
NAME OPTIONS(#) ($) DATE VALUE ($)(1)
- ---------------------------------------------------------- ----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Mark Smith................................................ 42,812 $ 10.00 12-31-21 1,070,289
Robert Giardina........................................... 32,793 10.00 12-31-21 819,829
Richard Pyle.............................................. 27,569 10.00 12-31-21 689,225
Alexander Alimanestianu................................... 27,199 10.00 12-31-21 679,983
Deborah Smith............................................. 9,530 10.00 12-31-21 238,257
</TABLE>
- ------------------------
(1) Based upon the liquidation preference of the Series B Preferred Stock. Does
not include dividends accruing at a rate of 14% per annum on the difference
between the exercise price and the liquidation value.
AGGREGATED OPTION/SAR EXERCISES DURING 1997 AND 1997 YEAR-END OPTION/SAR VALUES
The following summarizes exercises of stock options (granted in prior years)
by the named executive officers during fiscal 1997, as well as the number and
value of all unexercised options held by the named executive officers at the end
of fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FY-END (#) AT FY-END($)
----------------------- -------------------------
SHARES
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON REALIZED UNEXERCISABLE UNEXERCISABLE
EXERCISE(#) ($)(1) ----------------------- -------------------------
NAME COMMON COMMON COMMON PREFERRED COMMON PREFERRED
- ------------------------------------------------ --------- --------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Mark Smith...................................... 2,404 66,110 1,766/7,064 42,812/0 512/2,048 1,070,289/0
Robert Giardina................................. 31,252 921,193 1,766/7,063 32,793/0 512/2,048 819,829/0
Richard Pyle.................................... 1,548 42,570 1,766/7,062 27,569/0 512/2,048 689,225/0
Alexander Alimanestianu......................... 1,527 41,992 1,766/7,062 27,199/0 512/2,048 679,983/0
Deborah Smith................................... 578 15,895 1,070/4,280 9,530/0 310/1,241 238,257/0
</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.
MANAGEMENT EQUITY AGREEMENTS
Simultaneously with the Merger, 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. Upon the termination of an executive's employment, a portion
of the Common Class A shares purchased by each executive are subject to
repurchase by the Company, BRS or Farallon (the
41
<PAGE>
"Restricted Shares"). The Common Class A Restricted Shares vest over the course
of a five year period, or fully upon a sale of the Company or an initial public
offering of the Company's shares.
1996 COMMON STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Common Stock Option Plan (the
"Common Plan") designed to advance the Company's best interests by providing
additional incentives to executive and other key employees of the Company. The
Common Plan provides for aggregate option grants of 57,142 shares of the Common
Stock of the Company. The administration of the Common Plan, the selection of
participants, and the form and the amounts of the grants is within the sole
discretion of the Compensation Committee of the Board, subject to the
limitations of the Common Plan. As of August 31, 1997, option to purchase an
aggregate of 57,142 shares of the Common Stock at an exercise price of $1.00
were outstanding under the Common Plan.
1996 PREFERRED STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Preferred Stock Option Plan
(the "Preferred Plan") designed to advance the Company's best interests by
providing additional incentives to executive and other key employees of the
Company. The Preferred Plan provides for aggregate options grants of 164,782.56
Series B Preferred Shares of the Company. The administration of the Preferred
Plan, the selection of participants, and the form and the amounts of the grants
is in the sole discretion of the Board, subject to any limitations in the
Preferred Plan or in any option agreement. As of August 31, 1997, options to
purchase an aggregate of 164,782.56 shares of Preferred Stock at an exercise
price of $10.00 were outstanding under the Preferred Plan.
COMPANY BENEFIT PLANS
In April 1996, the Company implemented a 401(k) salary deferral plan (the
"Plan") which is available to eligible employees, as defined. The Plan provides
for the Company to make discretionary contributions. However, the Company
elected not to make contributions for either fiscal 1997 or 1996.
42
<PAGE>
SECURITY OWNERSHIP
The following table sets forth (as of August 31, 1997) certain information
with respect to the beneficial ownership of the Common Stock and Preferred Stock
by (i) any person or group who beneficially owns more than 5% of any class of
TSI'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 SERIES A SERIES B
OF COMMON PREFERRED PREFERRED
NAME COMMON STOCK STOCK STOCK STOCK
- --------------------------------------------------------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Bruckmann, Rosser, Sherrill & Co., L.P. (1)
126 East 56th Street, 29th Floor New York,
New York 10022......................................... 504,456.01 49.9% 104,330.35 --
Farallon Partners, L.L.C. (2)
One Maritime Plaza, Suite 1325
San Francisco, California 94111........................ 198,461.00 19.6% 41,045.46 --
Canterbury Mezzanine Capital, L.P. (3)
600 Fifth Avenue, 23rd Floor New York,
New York 10020......................................... 124,022.00 11.0% -- --
EXECUTIVE OFFICERS AND DIRECTORS
Mark Smith (4)........................................... 67,891.00 6.7% -- 42,811.56
Robert Giardina (4)...................................... 52,417.00 5.2% -- 32,793.16
Richard Pyle (4)......................................... 44,348.00 4.4% -- 27,569.00
Alexander Alimanestianu (4).............................. 43,777.00 4.3% -- 27,199.32
Deborah Smith (4)........................................ 16,978.00 1.7% -- 9,530.28
Bruce C. Bruckmann (5)................................... 517,231.29 51.2% 106,972.50 --
Stephen Edwards (6)...................................... 504,456.01 49.9% 104,330.35 --
Jason Fish (7)........................................... 198,461.00 19.6% 41,045.46 --
Directors and Officers as a group
(8 persons)(8)......................................... 928,328.01 91.2% 14,017.96 140,452.50
</TABLE>
- ------------------------
(1) Excludes shares held individually by Mr. Bruckmann and other individuals
(and affiliates thereof), each of whom are employed by BRS.
(2) 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.
(3) Includes a warrant to purchase 114,022 shares of Common Stock with an
exercise price of $.01 per share and an expiration date of December 10,
2006.
(4) Includes options to acquire, exercisable within sixty days, Common Stock,
and options, exercisable within sixty days, to acquire Series B Preferred
Stock, pursuant to the Company's 1996 Common Stock Option Plan and 1996
Preferred Stock Option Plan, respectively, each of which were approved and
instituted contemporaneously with the Merger. Messrs. Smith, Giardina,
Alimanestianu, and Pyle each hold options on 1,766 shares of Common Stock,
and Ms. Smith holds options on 1,070 shares of Common Stock. All shares of
Series B Preferred Stock beneficially owned by such persons are in the form
of options. The address for each of these named executive officers is the
same as the address of the Company's principal executive offices.
(5) Includes shares held by BRS, and certain other family members of Mr.
Bruckmann. Mr. Bruckmann disclaims beneficial ownership of such shares held
by BRS.
43
<PAGE>
(6) Includes shares held by BRS. Mr. Edwards disclaims beneficial ownership of
such shares.
(7) 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.
(8) 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 Farallon, Farallon, the
directors and named executive offices as a group beneficially own (i)
276,431.28 shares of Common Stock (which represents approximately 23.3% of
the Common Stock on a fully diluted basis), (ii) 3,824.15 shares of Series A
Preferred Stock, and (iii) 140,452.50 shares of Series B Preferred Stock.
44
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RECAPITALIZATION
In December 1996, the Company consummated the Merger pursuant to which,
among other things, (i) all shares of TSI's preferred stock outstanding prior to
the Merger ("Old Preferred Stock") were redeemed or converted into shares of
TSI's then authorized common stock ("Old Common Stock"), (ii) all shares of Old
Common Stock (other than shares held by certain members of TSI's management
team) were exchanged for cash, (iii) Bruckmann, Rosser, Sherrill & Co., L.P. and
certain of its employees and affiliates (collectively, "BRS"), Farallon Capital
Partners, L.P, Farallon Capital Institutional Partners, L.P., RR Capital
Partners, L.P., and Farallon Capital Institutional Partners II, L.P.
(collectively, "Farallon"), and certain members of TSI's management acquired
TSI's, newly authorized common stock, par value $0.001 per share ("Common
Stock"), Series A Preferred Stock ("Series A Preferred") and Series B Preferred
Stock ("Series B Preferred"). In addition, pursuant to the Merger, TSI
instituted a new option plan granting certain members of TSI's management
options to acquire TSI's newly authorized Series B Preferred Stock (the "Series
B Preferred") and Common Stock.
SHAREHOLDERS AGREEMENT
In connection with the Merger, the Company, BRS, Farallon, Canterbury
Mezzanine Capital, L.P. ("Canterbury"), and certain of the members of TSI's
management, entered into a Shareholders Agreement, dated as of December 10, 1996
(as amended, the "Shareholders Agreement"). The Shareholders Agreement provides,
among other things, for the following: (i) an agreement by all parties to vote
their Common Stock so as to cause the Board of Directors of the Company to
consist of six members, two of whom shall be selected by BRS (currently, Messrs.
Bruckmann and Edwards), one of whom shall be selected by Farallon (currently,
Mr. Fish), one of whom shall be the Chief Executive Officer of the Company
(currently, Mr. Smith), and two of whom shall be elected by a majority vote of
the holders of the Common Stock (currently, Messrs. Arnold and Alessi), (ii)
certain restrictions on transfer of the Common Stock, including, but not limited
to, provisions providing that (A) the Company and certain holders of the Common
Stock will have limited rights of first offer in any proposed third party sale
of Common Stock by any of the Company's shareholders, and (B) certain holders of
the Common Stock will have limited participation rights in any proposed third
party sale of Common Stock by BRS, (iii) certain limited preemptive rights to
the Company's shareholders with respect to any issuance or sale of Common Stock
by the Company, and (iv) an agreement by all parties that, upon approval of a
sale of all Common Stock or a sale of all or substantially all of the Company's
assets by the Company's Board of Directors and BRS, such parties will consent to
and raise no objections against such sale and sell its Common Stock in such
sale, if so required. Messrs. Arnold and Alessi have, subsequent to the Merger,
agreed to become bound by the Shareholders Agreement as a party thereto.
REGISTRATION RIGHTS AGREEMENT
In connection with the Merger, the parties to the Shareholders Agreement
contemporaneously entered into a Registration Rights Agreement, dated December
10, 1996 (as amended, the "Shareholder Registration Rights Agreement"). Pursuant
to the terms of the Shareholder Registration Rights Agreement, BRS, Farallon,
and Canterbury 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") 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. Canterbury is entitled to demand up to two short-form
registrations.
45
<PAGE>
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
Shareholder 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 Merger, 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 $0.25 million per calendar year while they own at least 20% of the
outstanding Common Stock of the Company. The Company also paid BRS Co. and
Farallon transaction fees of $0.6 million and $0.2 million, respectively for
investment banking advisory services rendered to the Company in connection with
the Merger.
DESCRIPTION OF NEW CREDIT FACILITY
Concurrently with the Initial Offering, TSI amended and restated its
Existing Credit Agreement, dated as of December 10, 1996 by and among TSI,
Bankers Trust Company, and certain lenders from time to time a party thereto
(the "New Credit Facility"). The following is a summary description of the
principal terms of the New Credit Facility and is subject to, and qualified in
its entirety by reference to, the New Credit Facility, copies of which are
available upon request to the Company. See "Available Information".
STRUCTURE. The New Credit Facility provides for, subject to certain terms
and conditions, a $15.0 million revolving credit facility. The New Credit
Facility has a final scheduled maturity date of October 15, 2002 and does not
require scheduled interim reductions. The New Credit Facility requires, under
certain circumstances, TSI to make mandatory prepayments and commitment
reductions. In addition, TSI may make optional prepayments and commitment
reductions pursuant to the terms of the New Credit Facility.
SECURITY. The New Credit Facility is collateralized by a pledge of all the
capital stock owned by the Company and a first priority security interest in
certain property of the Company (including receivables, equipment, owned real
estate, inventory, trademark and copyrights).
INTEREST RATES. Borrowings under the New Credit Facility accrue interest at
either the Alternate Base Rate (the "Alternate Base Rate") plus 1.50% or a rate
equal to the Eurodollar borrowing rate plus 2.50% at the option of TSI.
COVENANTS. The New Credit Facility contains certain covenants that, among
other things, restrict the ability of TSI and its subsidiaries to dispose of
assets, incur additional indebtedness, incur guarantee obligations, repay
indebtedness or amend debt instruments, pay dividends, create liens on assets,
make investments, make acquisitions, engage in mergers or consolidations, or
engage in certain transactions with subsidiaries and affiliates and otherwise
restrict corporate activities. In addition, the New Credit Facility requires TSI
to comply with certain financial ratios and coverage tests.
EVENTS OF DEFAULT. The New Credit Facility also includes customary events
of default. The occurance of any such events of default could result in
acceleration of the Company's obligations under the New Credit Facility and
foreclosure on the collateral securing such obligations, which could have a
material adverse effect on holders of the New Notes.
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DESCRIPTION OF NOTES
GENERAL
The form and terms of the New Notes are the same as the form and terms of
the Old Notes except that (i) the New Notes will have been registered under the
Securities Act and thus will not bear legends restricting their transfer
pursuant to the Securities Act and (ii) holders of New Notes will not be
entitled to certain rights of holders of the Old Notes under the Registration
Rights Agreement which will terminate upon the consummation of the Exchange
Offer. The Old Notes have been, and the New Notes are to be, issued under an
indenture (the "Indenture"), dated as of October 16, 1997, between the Company
and United States Trust Company of New York, as Trustee (the "Trustee"). The
following summary of certain provisions of the Indenture and the Notes, copies
of which are available upon request to the Company at the address set forth
under "Available Information", does not purport to be complete and is subject
to, and is qualified in its entirety by reference to, the Trust Indenture Act of
1939, as amended (the "TIA"), and to all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
of the Indenture by reference to the TIA as in effect on the date of the
Indenture. As used in this "Description of Notes" section, the "Company" means
Town Sports International, Inc. The definitions of certain capitalized terms
used in the following summary are set forth below under "--Certain Definitions."
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes at
the Trustee's corporate office in New York, New York. At the Company's option,
interest may be paid at the Trustee's corporate trust office or by check mailed
to the registered address of Holders. Any Notes that remain outstanding after
the completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are unsecured senior obligations of the Company and are limited in
aggregate principal amount to $125.0 million, of which $85.0 million will be
issued in the Offering. The Notes will mature on October 15, 2004. Interest on
the Notes will accrue at the rate of 9 3/4% per annum and will be payable
semiannually in cash on each April 15 and October 15, commencing on April 15,
1998, to the persons who are registered Holders at the close of business on the
April 1 and October 1 immediately preceding the applicable interest payment
date. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from and including the
date of issuance.
The Notes will not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's option,
in whole at any time or in part from time to time, on and after October 15,
2001, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
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redeemed during the twelve-month period commencing on October 15 of the year set
forth below, plus, in each case, accrued and unpaid interest thereon, if any, to
the date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------------------------------- -----------
<S> <C>
2001.................................................................................. 104.875%
2002.................................................................................. 102.438%
2003 and thereafter................................................................... 100.000%
</TABLE>
Optional Redemption upon Public Equity Offerings. At any time, or from time
to time, on or prior to October 15, 2000, the Company may, at its option, use
the net cash proceeds of one or more Public Equity Offerings (as defined below)
to redeem up to 35% of the Notes issued under the Indenture at a redemption
price equal to 109.750% of the principal amount thereof plus accrued and unpaid
interest thereon, if any, to the date of redemption; provided that at least 65%
of the principal amount of Notes issued under the Indenture remains outstanding
immediately after any such redemption. In order to effect the foregoing
redemption with the proceeds of any Public Equity Offering, the Company shall
make such redemption not more than 120 days after the consummation of any such
Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
At any time on or prior to October 15, 2002, the Notes may also be redeemed
as a whole but not in part at the option of the Company upon the occurrence of a
Change of Control, upon not less than 30 nor more than 60 days' prior notice
(but in no event more than 90 days after the occurrence of such Change of
Control) mailed by first-class mail to each Holder's registered address, at a
redemption price equal to 100% of the principal amount thereof plus the
Applicable Premium as of, and accrued but unpaid interest, if any, to, the date
of redemption (the "Redemption Date") (subject to the rights of Holders on the
relevant record date to receive interest due on the relevant interest payment
date).
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at October 15, 2002 (such redemption price being described under "-- Optional
Redemption") plus (2) all required interest payments (excluding accrued but
unpaid interest) due on such Note through October 15, 2002, computed using a
discount rate equal to the Treasury Rate plus 75 basis points, over (B) the
principal amount of such Note.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H. 15(519)
which has become publicly available at least two Business Days prior to the
Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source or similar market data)) most nearly equal to the
period from the Redemption Date to October 15, 2002, provided, however, that if
the period from the Redemption Date to October 15, 2002 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to October 15, 2002 is
less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time,
selection of such Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which such Notes are listed or, if such Notes are not then listed on a national
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securities exchange, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Notes of a
principal amount of $1,000 or less shall be redeemed in part; provided, further,
that if a partial redemption is made with the proceeds of a Public Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which the Change of Control occurred,
the Company must send, by first class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 45 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Subsidiaries to incur additional Indebtedness, to grant liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Subsidiaries by the management of the Company. While
such restrictions cover a wide variety of arrangements which have traditionally
been used to effect highly leveraged transactions, the Indenture may not afford
the Holders of Notes protection in all circumstances from the adverse aspects of
a highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
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The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of the Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company may incur Indebtedness
(including, without limitation, Acquired Indebtedness) if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence thereof,
the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.00
to 1.00.
The Company will not, directly or indirectly, in any event incur any
Indebtedness which by its terms (or by the terms of any agreement governing such
Indebtedness) is subordinated to any other Indebtedness of the Company unless
such Indebtedness is also by its terms (or by the terms of any agreement
governing such Indebtedness) made expressly subordinate to the Notes to the same
extent and in the same manner as such Indebtedness is subordinated pursuant to
subordination provisions that are most favorable to the holders of any other
Indebtedness of the Company.
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not cause
or permit any of the Restricted Subsidiaries to, directly or indirectly, (a)
declare or pay any dividend or make any distribution (other than dividends or
distributions payable in Qualified Capital Stock of the Company) on or in
respect of shares of the Company's Capital Stock to holders of such Capital
Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any warrants, rights or options to purchase or acquire
shares of any class of such Capital Stock, (c) make any principal payment on,
purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for
value, prior to any scheduled maturity, scheduled or mandatory repayment or
scheduled sinking fund payment, any Indebtedness of the Company or its
Subsidiaries that is subordinate or junior in right of payment to the Notes, or
(d) make any Investment (other than Permitted Investments) (each of the
foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to
as a "Restricted Payment"), if at the time of such Restricted Payment or
immediately after giving effect thereto, (i) a Default or an Event of Default
shall have occurred and be continuing or (ii) the Company is not able to incur
at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in
compliance with the covenant described under "-- Limitation on Incurrence of
Additional Indebtedness" or (iii) the aggregate amount of Restricted Payments
(including such proposed Restricted Payment) made subsequent to the Issue Date
(the amount expended for such purposes, if other than in cash, being the fair
market value of such property as determined reasonably and in good faith by the
Board of Directors of the Company) shall exceed the sum of without duplication:
(w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the date the Restricted Payment
occurs (the "Reference Date") (treating such period as a single accounting
period); plus (x) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company) from the
issuance and sale subsequent to the Issue Date and on or prior to the Reference
Date of Qualified Capital Stock of the
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Company; plus (y) without duplication of any amounts included in clause (iii)(x)
above, 100% of the aggregate net cash proceeds of any equity contribution
received by the Company from a holder of the Company's Capital Stock; plus (z)
an amount equal to the sum of (1) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of loans or
advances or other transfers of assets by any Unrestricted Subsidiary to the
Company or any Restricted Subsidiary or the receipt of proceeds by the Company
or any Restricted Subsidiary from the sale or other disposition of any portion
of the Capital Stock of any Unrestricted Subsidiary, in each case occurring
subsequent to the Issue Date, and (2) the consolidated net Investments on the
date of Revocation made by the Company or any of the Restricted Subsidiaries in
any Subsidiary of the Company that has been designated an Unrestricted
Subsidiary after the Issue Date upon its redesignation as a Restricted
Subsidiary in accordance with the covenant described under "--Limitation on
Designations of Unrestricted Subsidiaries."
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend or
redemption payment within 60 days after the date of declaration of such dividend
if the dividend or redemption payment, as the case may be, would have been
permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any shares of Capital
Stock of the Company, either (i) solely in exchange for shares of Qualified
Capital Stock of the Company or (ii) through the application of net proceeds of
a substantially concurrent sale for cash (other than to a Restricted Subsidiary
of the Company) of shares of Qualified Capital Stock of the Company; (3) if no
Default or Event of Default shall have occurred and be continuing, the
acquisition of any Indebtedness of the Company or a Subsidiary of the Company
that is subordinate or junior in right of payment to the Notes either (i) solely
in exchange for shares of Qualified Capital Stock of the Company, or (ii)
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Restricted Subsidiary of the Company) of (A) shares of
Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; and (4)
so long as no Default or Event of Default shall have occurred and be continuing,
repurchases by the Company of Capital Stock of the Company or options to
purchase Capital Stock of the Company, stock appreciation rights or any similar
equity interest in the Company from directors and employees of the Company or
any of its Subsidiaries or their authorized representatives upon the death,
disability or termination of employment of such employees, in an aggregate
amount not to exceed $0.5 million in any calendar year; and (5) so long as no
Default or Event of Default shall have occurred and be continuing, repurchases
by the Company of shares of its Series B Preferred Stock held by directors and
employees of the Company pursuant to provisions thereof requiring the redemption
thereof at the election of the holders thereof at any time following an initial
public offering of the Company. In determining the aggregate amount of
Restricted Payments made subsequent to the Issue Date in accordance with clause
(iii) of the immediately preceding paragraph, amounts expended pursuant to
clauses (1), (2)(ii), (3)(ii)(A), (4) and (5) above shall be included in such
calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any of
the Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company
or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 80% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; provided, however, that the amount of (A) any
liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet or the notes thereto), of the Company or any Restricted
Subsidiary (other than liabilities that are by their terms subordinated to the
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Notes) that are assumed by the transferee in such Asset Sale and from which the
Company or such Restricted Subsidiary is released and (B) any notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash
Equivalents received), shall be deemed to be cash for the purposes of this
provision; and (iii) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 360 days of receipt thereof either (A) to
prepay any Indebtedness ranking at least pari passu with the Notes (including
amounts under the Credit Facility) and, in the case of any such Indebtedness
under any revolving credit facility, effect a permanent reduction in the
availability under such revolving credit facility, (B) to make an investment in
properties and assets that replace the properties and assets that were the
subject of such Asset Sale or in properties and assets that will be used in the
business of the Company and the Restricted Subsidiaries as existing on the Issue
Date or in businesses reasonably related thereto ("Replacement Assets"), or (C)
a combination of prepayment and investment permitted by the foregoing clauses
(iii)(A) and (iii)(B). On the 361st day after an Asset Sale or such earlier
date, if any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset
Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate
amount of Net Cash Proceeds which have not been applied on or before such Net
Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and
(iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary to make an offer
to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer
Payment Date") not less than 45 nor more than 60 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that
amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100%
of the principal amount of the Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however, that if at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary, as the case may be, in connection with any Asset Sale is converted
into or sold or otherwise disposed of for cash (other than interest received
with respect to any such non- cash consideration), then such conversion or
disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $5 million resulting from one
or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, not just the amount in excess of $5 million, shall be applied as
required pursuant to this paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and the Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and the Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or the Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets and (ii) such
Asset Sale is for fair market value; provided that any consideration not
constituting Replacement Assets received by the Company or any of the Restricted
Subsidiaries in connection with any Asset Sale permitted to be consummated under
this paragraph shall constitute Net Cash Proceeds subject to the provisions of
the two preceding paragraphs.
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Each Net Proceeds Offer will be mailed to the record Holders as shown on the
register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not cause or permit any of the
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Subsidiary; or (c) transfer any of its property or assets to the
Company or any other Restricted Subsidiary, except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture and the Notes; (3) customary non-assignment provisions of any contract
or any lease governing a leasehold interest of any Restricted Subsidiary; (4)
any instrument governing Acquired Indebtedness, which encumbrance or restriction
is not applicable to any Person, or the properties or assets of any Person,
other than the Person or the properties or assets of the Person so acquired
(including, but not limited to, such Person's direct and indirect Subsidiaries);
(5) agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; or (6) an agreement governing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (2), (4) or (5) above; provided,
however, that the provisions relating to such encumbrance or restriction
contained in any such Indebtedness are no less favorable to the Company in any
material respect as determined by the Board of Directors of the Company in its
reasonable and good faith judgment than the provisions relating to such
encumbrance or restriction contained in agreements referred to in such clause
(2), (4) or (5).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES. The Company will
not permit any of the Restricted Subsidiaries to issue any Preferred Stock
(other than to the Company or to a Wholly Owned Restricted Subsidiary) or permit
any Person (other than the Company or a Wholly Owned Restricted Subsidiary) to
own any Preferred Stock of any Restricted Subsidiary.
LIMITATION ON LIENS. The Company will not, and will not cause or permit any
of the Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or permit or suffer to exist any Liens upon any property or assets of the
Company or any of the Restricted Subsidiaries whether owned on the Issue Date or
acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise
convey any right to receive income or profits therefrom unless (i) in the case
of Liens securing Indebtedness that is expressly subordinate or junior in right
of payment to the Notes, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Liens and (ii) in all
other cases, the Notes are secured on an equal and ratable basis, except for (a)
Liens existing as of the Issue Date to the extent and in the manner such Liens
are in effect on the Issue Date; (b) Liens securing Indebtedness under the
Credit Facility; (c) Liens securing the Notes; (d) Liens of the Company or a
Restricted Subsidiary on assets of any Restricted Subsidiary of the Company; (e)
Liens securing Refinancing Indebtedness which is incurred to Refinance any
Indebtedness which has been secured by a Lien permitted under the Indenture and
which
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has been incurred in accordance with the provisions of the Indenture; provided,
however, that such Liens (A) are no less favorable to the Holders and are not
more favorable to the lienholders with respect to such Liens than the Liens in
respect of the Indebtedness being Refinanced and (B) do not extend to or cover
any property or assets of the Company or any of the Restricted Subsidiaries not
securing the Indebtedness so Refinanced; (f) Liens in favor of the Company; and
(g) Permitted Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a single
transaction or series of related transactions, consolidate or merge with or into
any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary to sell, assign, transfer, lease,
convey or otherwise dispose of) all or substantially all of the Company's assets
(determined on a consolidated basis for the Company and the Restricted
Subsidiaries) whether as an entirety or substantially as an entirety to any
Person unless: (i) either (1) the Company shall be the surviving or continuing
corporation or (2) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the Person which acquires
by sale, assignment, transfer, lease, conveyance or other disposition the
properties and assets of the Company and of the Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction and the assumption
contemplated by clause (i) (2) (y) above (including giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction), the Company or such
Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction and (2) shall be able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) pursuant to the
covenant described under "--Limitation on Incurrence of Additional
Indebtedness"; (iii) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (i) (2) (y) above
(including, without limitation, giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (iv) the Company or the
Surviving Entity shall have delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that such consolidation, merger, sale,
assignment, transfer, lease, conveyance or other disposition and, if a
supplemental indenture is required in connection with such transaction, such
supplemental indenture comply with the applicable provisions of the Indenture
and that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
in accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture and the
Notes with the same effect as if such Surviving Entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of the Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate
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Transaction"), other than (x) Affiliate Transactions permitted under paragraph
(b) below and (y) Affiliate Transactions on terms that are no less favorable
than those that might reasonably have been obtained in a comparable transaction
at such time on an arm's-length basis from a Person that is not an Affiliate of
the Company or such Restricted Subsidiary. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $2.5 million shall be approved by the Board of Directors of the
Company or such Restricted Subsidiary, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10.0 million, the Company or such
Restricted Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain an opinion stating that such transaction or series of related
transactions are fair to the Company or the relevant Restricted Subsidiary, as
the case may be, from a financial point of view, from an Independent Financial
Advisor.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Company's Board of Directors; (ii)
transactions exclusively between or among the Company and any of the Restricted
Subsidiaries or exclusively between or among such Restricted Subsidiaries,
provided such transactions are not otherwise prohibited by the Indenture; (iii)
Restricted Payments permitted by the Indenture; and (iv) advisory fees pursuant
to the Professional Services Agreement between the Company and BRS Group in
effect on the issue date.
LIMITATION OF GUARANTEES BY RESTRICTED SUBSIDIARIES. The Company will not
permit any Restricted Subsidiary, directly or indirectly, by way of the pledge
of any intercompany note or otherwise, to assume, guarantee or in any other
manner become liable with respect to any Indebtedness of the Company (other than
Indebtedness incurred under the Credit Facility) unless, in any such case (a)
such Restricted Subsidiary executes and delivers a supplemental indenture to the
Indenture, providing a guarantee of payment of the Notes by such Restricted
Subsidiary in the form required by the Indenture (the "Guarantee") and (b) if
such assumption, guarantee or other liability of such Restricted Subsidiary is
provided in respect of Indebtedness that is expressly subordinated to the Notes,
the guarantee or other instrument provided by such Restricted Subsidiary in
respect of such subordinate Indebtedness shall be subordinated to the Guarantee
pursuant to subordination provisions not less favorable to the Holders of the
Notes than those contained in the indenture or similar document governing such
subordinated Indebtedness.
Notwithstanding the foregoing, any such Guarantee by a Restricted Subsidiary
of the Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged, without any further action required on
the part of the Trustee or any Holder, upon: (i) the unconditional release of
such Restricted Subsidiary from its liability in respect of the Indebtedness in
connection with which such Guarantee was executed and delivered pursuant to the
preceding paragraph; or (ii) any sale or other disposition (by merger or
otherwise) to any Person which is not a Restricted Subsidiary of the Company, of
all of the Company's Capital Stock in, or all or substantially all of the assets
of, such Restricted Subsidiary; provided, however, that (a) such sale or
disposition of such Capital Stock or assets is otherwise in compliance with the
terms of the Indenture and (b) such assumption, guarantee or other liability of
such Restricted Subsidiary has been released by the holders of the other
Indebtedness so guaranteed.
REPORTS TO HOLDERS. The Company will deliver to the Trustee within 15 days
after the filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. The Indenture further provides that,
notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the Commission, upon the earlier of the effectiveness of the Exchange Offer
Registration
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Statement and 150 days following the Issue Date, and provide the Trustee and
Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA Section 314(a).
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Company may
designate any Subsidiary of the Company (other than a Subsidiary of the Company
which owns Capital Stock of a Restricted Subsidiary) as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the sum of (i)
fair market value of the Capital Stock of such Subsidiary owned by the
Company and the Restricted Subsidiaries on such date and (ii) the aggregate
amount of other Investments of the Company and the Restricted Subsidiaries
in such Subsidiary on such date; and
(c) the Company would be permitted to incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the covenant
described under "--Limitation on Incurrence of Additional Indebtedness" at
the time of Designation (assuming the effectiveness of such Designation).
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
described under "--Limitation on Restricted Payments" for all purposes of the
Indenture in the Designation Amount. The Indenture will further provide that the
Company shall not, and shall not permit any Restricted Subsidiary to, at any
time (x) provide direct or indirect credit support for or a guarantee of any
Indebtedness of any Unrestricted Subsidiary (including of any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be directly or
indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be
directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except, in the case of
clause (x) or (y), to the extent permitted under the covenant described under
"--Limitation on Restricted Payments."
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
whereupon such Subsidiary shall then constitute a Restricted Subsidiary, if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company certifying compliance with the foregoing provisions.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days;
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(ii) the failure to pay the principal on any Notes, when such principal
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered pursuant
to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a period of
30 days after the Company receives written notice specifying the default
(and demanding that such default be remedied) from the Trustee or the
Holders of at least 25% of the outstanding principal amount of the Notes
(except in the case of a default with respect to the covenant described
under "--Certain Covenants--Merger, Consolidation and Sale of Assets," which
will constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount of
any Indebtedness of the Company or any Restricted Subsidiary, or the
acceleration of the final stated maturity of any such Indebtedness if the
aggregate principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay
principal at final maturity or which has been accelerated, aggregates $2.5
million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $2.5
million shall have been rendered against the Company or any of the
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non- appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Subsidiaries.
If an Event of Default (other than an Event of Default specified in clause
(vi) above relating to the Company) shall occur and be continuing, the Trustee
or the Holders of at least 25% in principal amount of outstanding Notes may
declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default, and the same shall become immediately due and
payable. If an Event of Default specified in clause (vi) above relating to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable
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indemnity. Subject to all provisions of the Indenture and applicable law, the
Holders of a majority in aggregate principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders to receive payments in respect of
the principal of, premium, if any, and interest on the Notes when such payments
are due, (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payments, (iii) the
rights, powers, trust, duties and immunities of the Trustee and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not
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made by the Company with the intent of preferring the Holders over any other
creditors of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; (vii) the Company shall
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance have been complied with; (viii)
the Company shall have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (ix)
certain other customary conditions precedent are satisfied. Notwithstanding the
foregoing, the opinion of counsel required by clauses (ii)(A) and (iii) above
need not be delivered if all the Notes not theretofore delivered to the Trustee
for cancellation (i) have become due and payable, (ii) will become due and
payable on the maturity date within one year, or (iii) are to be called for
redemption within one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by such Trustee in the name, and at the
expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may: (i) reduce the amount of Notes whose Holders must consent to an
amendment; (ii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes; (iii)
reduce the principal of or change or have the effect of changing the fixed
maturity of any Notes, or change the date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor;
(iv) make any Notes payable in money other than that stated in the Notes; (v)
make any change in provisions of the Indenture protecting the right of each
Holder to receive payment of principal of and interest on such Note on or after
the due date thereof or to bring suit to enforce such payment, or permitting
Holders of a majority in principal amount of Notes to waive Defaults or Events
of Default; (vi) amend, change or modify in any material respect the obligation
of the Company to make and consummate a Change of Control Offer in the event of
a Change of Control or make and consummate a Net Proceeds Offer with respect to
any Asset Sale that has been consummated or modify any of the provisions or
definitions with respect thereto; or (vii) modify or change any provision of the
Indenture or the related definitions affecting the ranking of the Notes in a
manner which adversely affects the Holders.
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GOVERNING LAW
The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company or of a
Subsidiary of the Company, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided that if the Trustee acquires any conflicting interest as
described in the TIA, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary or
at the time it merges or consolidates with the Company or any of the Restricted
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Restricted Subsidiary
or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "--Certain
Covenants--Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any Restricted
Subsidiary in any other Person pursuant to which such Person shall become a
Restricted Subsidiary or shall be merged with or into the Company or any
Restricted Subsidiary, or (b) the acquisition by the Company or any Restricted
Subsidiary of the assets of any Person (other than a Restricted Subsidiary)
which constitute all or substantially all of the assets of such Person or
comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
the Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Subsidiary of (a) any Capital
Stock of any Restricted
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Subsidiary; or (b) any other property or assets of the Company or any Restricted
Subsidiary other than in the ordinary course of business; provided, however,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or the Restricted Subsidiaries receive
aggregate consideration of less than $1.0 million, (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "--Certain Covenants--Merger,
Consolidation and Sale of Assets," (iii) disposals or replacements of obsolete
equipment in the ordinary course of business, (iv) the sale, lease, conveyance,
disposition or other transfer by the Company or any Restricted Subsidiary of
assets or property to the Company or one or more Restricted Subsidiaries and (v)
any Restricted Payment.
"Board of Directors" means, as to any Person, the board of directors of such
Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted by the Board of Directors of such Person and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"BRS Group" means, Bruckmann, Rosser, Sherill & Co., Inc. and its
Affiliates.
"Business Day" means a day other than a Saturday, Sunday or other day in
which commercial banking institutions (including, without limitation, the
Federal Reserve System) are authorized or required by law to close in New York
City.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250.0 million; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture); (ii) the
approval by the holders of Capital Stock of the
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Company of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of the
Indenture); (iii) any Person or Group, other than a Permitted Holder, shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 50% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company; or (iv) the replacement
of a majority of the Board of Directors of the Company over a two- year period
from the directors who constituted the Board of Directors of the Company at the
beginning of such period, and such replacement shall not have been approved by a
vote of at least a majority of the Board of Directors of the Company then still
in office who either were members of any such Board of Directors at the
beginning of such period or whose election as a member of any such Board of
Directors was previously so approved.
"Change of Control Offer" has the meaning set forth under "--Change of
Control."
"Change of Control Payment Date" has the meaning set forth under "--Change
of Control."
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means Town Sports International, Inc., a New York corporation.
"Consolidated EBITDA" means, for any period, the sum (without duplication)
of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income
has been reduced thereby, (A) all income taxes of the Company and the Restricted
Subsidiaries paid or accrued in accordance with GAAP for such period (other than
income taxes attributable to extraordinary, unusual or nonrecurring gains or
losses or taxes attributable to sales or dispositions outside the ordinary
course of business), (B) Consolidated Interest Expense and (C) Consolidated
Non-cash Charges less any non- cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for the Company and the
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means the ratio of Consolidated
EBITDA during the four full fiscal quarters (the "Four Quarter Period") ending
on or prior to the date of the transaction giving rise to the need to calculate
the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to
Consolidated Fixed Charges for the Four Quarter Period. In addition to and
without limitation of the foregoing, for purposes of this definition,
"Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after
giving effect on a pro forma (including any pro forma expense and cost
reductions calculated on a basis consistent with Regulation S-X under the
Securities Act) basis for the period of such calculation to (i) the incurrence
or repayment of any Indebtedness of the Company or any of the Restricted
Subsidiaries (and the application of the proceeds thereof) giving rise to the
need to make such calculation and any incurrence or repayment of other
Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (ii) any
Asset Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of the Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also including
any Consolidated EBITDA attributable to the assets which are the subject of the
Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during
the Four Quarter Period or at any time subsequent to the last day of the Four
Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or
Asset Acquisition (including the incurrence, assumption or liability for any
such Acquired Indebtedness) occurred on the first day of the Four Quarter
Period. If the
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Company or any of the Restricted Subsidiaries directly or indirectly guarantees
Indebtedness of a third Person, the preceding sentence shall give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any such
Restricted Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding
Indebtedness determined on a fluctuating basis as of the Transaction Date and
which will continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest on such
Indebtedness in effect on the Transaction Date; (2) if interest on any
Indebtedness actually incurred on the Transaction Date may optionally be
determined at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in effect during the
Four Quarter Period; and (3) notwithstanding clause (1) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations, shall be deemed to
accrue at the rate per annum resulting after giving effect to the operation of
such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of the Company and the Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (a) any amortization of debt discount, (b) the net costs under
Interest Swap Obligations, (c) all capitalized interest and (d) the interest
portion of any deferred payment obligation; and (ii) the interest component of
Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or
accrued by the Company and the Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company, for any
period, the aggregate net income (or loss) of the Company and the Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
or losses from Asset Sales or abandonments or reserves relating thereto, (b)
after-tax items classified as extraordinary or nonrecurring gains or losses, (c)
the net income (or loss) of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary or is
merged or consolidated with the Company or any Restricted Subsidiary, (d) the
net income (but not loss) of any Restricted Subsidiary to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income of any Person, other than the Company or a Restricted Subsidiary,
except to the extent of cash dividends or distributions paid to the Company or
to a Restricted Subsidiary by such Person, (f) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued) and (g) in the case of a successor to the Company by consolidation
or merger or as a transferee of the Company's assets, any net income of the
successor corporation prior to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person; provided that the Consolidated Net Worth of any Person
shall exclude the effect of any non-cash charges relating to the acceleration of
stock options or similar securities of such Person or another Person with which
such Person is merged or consolidated.
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"Consolidated Non-cash Charges" means, with respect to the Company, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
the Company and the Restricted Subsidiaries reducing Consolidated Net Income of
the Company for such period, determined on a consolidated basis in accordance
with GAAP (including deferred rent but excluding any such charge which requires
an accrual of or a reserve for cash charges for any future period).
"Covenant Defeasance" has the meaning set forth under "--Legal Defeasance
and Covenant Defeasance."
"Credit Facility" means the amended and restated Credit Agreement dated as
of the Issue Date by and among the Company, Bankers Trust Company and certain
lenders from time to time a party thereto, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder or adding Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement agreement and
whether by the same or any other agent, lender or group of lenders.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof on or prior to the final
maturity date of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute or statutes thereto.
"Exchange Offer Registration Statement" means the registration statement
filed by the Company pursuant to the Registration Rights Agreement.
"Farallon" means Farallon Partners, L.L.C. and Affiliates.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date. All
ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP applied on a consistent basis,
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except that calculations made for purposes of determining compliance with the
terms of the covenants and with other provisions of the Indenture shall be made
without giving effect to (i) the deduction or amortization of any premiums, fees
and expenses incurred in connection with any financings or any other permitted
incurrence of Indebtedness and (ii) depreciation, amortization or other expenses
recorded as a result of the application of purchase accounting in accordance
with Accounting Principles Board Opinion Nos. 16 and 17.
"incur" has the meaning set forth under "--Certain Covenants--Limitation on
Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 160 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market value of such property or asset or the amount of the Obligation
so secured, (viii) all Obligations under currency agreements and interest swap
agreements of such Person and (ix) all Disqualified Capital Stock issued by such
Person with the amount of Indebtedness represented by such Disqualified Capital
Stock being equal to the greater of its voluntary or involuntary liquidation
preference and its maximum fixed repurchase price. For purposes hereof, the
"maximum fixed repurchase price" of any Disqualified Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the Company. The amount of Indebtedness of any Person at any date
shall be the outstanding balance on such date of all unconditional Obligations
as described above, and the maximum liability upon the occurrence of the
contingency giving rise to the Obligation, on any contingent Obligations at such
date; provided, however, that the amount outstanding at any time of any
Indebtedness incurred with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Initial Purchaser" means BT Alex. Brown.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
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"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and the Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. If the Company or any Restricted Subsidiary
sells or otherwise disposes of any Common Stock of any direct or indirect
Restricted Subsidiary such that, after giving effect to any such sale or
disposition, it ceases to be a Subsidiary of the Company, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under "--Legal Defeasance and
Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of the Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale and (d) appropriate
amounts to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holder" means any of BRS Group, Farallon and their respective
Affiliates.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Notes and the Indenture incurred as of the
Issue Date;
(ii) Indebtedness incurred pursuant to the Credit Facility in an
aggregate principal amount at any time outstanding not to exceed $25
million, less any required permanent repayments under all revolving credit
facilities in accordance with the provisions set forth under "Certain
Covenants-- Limitation on Asset Sales" (which are accompanied by a
corresponding permanent commitment reduction) thereunder;
(iii) other Indebtedness (including Capitalized Lease Obligations) of the
Company and the Restricted Subsidiaries outstanding on the Issue Date;
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(iv) Purchase Money Indebtedness of the Company and Capitalized Lease
Obligations of the Company and, to the extent constituting Acquired
Indebtedness, of the Restricted Subsidiaries in an aggregate amount for all
Indebtedness incurred pursuant to this subclause (iv) not to exceed $20
million outstanding at any one time;
(v) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of the Restricted Subsidiaries; provided, however, that
such Interest Swap Obligations are entered into to protect the Company and
the Restricted Subsidiaries from fluctuations in interest rates on
Indebtedness incurred in accordance with the Indenture to the extent the
notional principal amount of such Interest Swap Obligation does not exceed
the principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(vi) Indebtedness under Currency Agreements; provided that in the case
of Currency Agreements which relate to Indebtedness, such Currency
Agreements do not increase the Indebtedness of the Company and the
Restricted Subsidiaries outstanding other than as a result of fluctuations
in foreign currency exchange rates or by reason of fees, indemnities and
compensation payable thereunder;
(vii) Indebtedness of a Restricted Subsidiary to the Company or to a
Restricted Subsidiary for so long as such Indebtedness is held by the
Company or a Restricted Subsidiary, in each case subject to no Lien held by
a Person other than the Company or a Restricted Subsidiary; provided that if
as of any date any Person other than the Company or a Restricted Subsidiary
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(viii) Indebtedness of the Company to a Restricted Subsidiary for so long
as such Indebtedness is held by a Restricted Subsidiary, in each case
subject to no Lien; provided that (a) any Indebtedness of the Company to any
Restricted Subsidiary is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the Indenture and the Notes
and (b) if as of any date any Person other than a Restricted Subsidiary owns
or holds any such Indebtedness or any Person holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;
(ix) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within two business days of incurrence;
(x) Indebtedness of the Company or any of the Restricted Subsidiaries
represented by letters of credit for the account of the Company or such
Restricted Subsidiary, as the case may be, in order to provide security for
workers' compensation claims, payment obligations in connection with self-
insurance or similar requirements in the ordinary course of business;
(xi) Refinancing Indebtedness; and
(xii) additional Indebtedness of the Company in an aggregate principal
amount not to exceed $10 million at any one time outstanding.
"Permitted Investments" means (i) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary, (ii) Investments in the Company by any
Restricted Subsidiary; provided that any Indebtedness incurred by the Company
evidencing such Investment by a Restricted Subsidiary is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (iii) investments in cash and Cash
Equivalents;
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(iv) loans and advances to employees and officers of the Company and the
Restricted Subsidiaries in the ordinary course of business for bona fide
business purposes not in excess of $5.0 million at any one time outstanding; (v)
Currency Agreements and Interest Swap Obligations entered into in the ordinary
course of the Company's or a Restricted Subsidiary's businesses and otherwise in
compliance with the Indenture; (vi) other Investments, including Investments in
Unrestricted Subsidiaries not to exceed $5.0 million at any one time
outstanding; (vii) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers; and (viii)
Investments made by the Company or the Restricted Subsidiaries as a result of
consideration received in connection with an Asset Sale made in compliance with
the covenant described under "--Certain Covenants--Limitation on Asset Sales."
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or the Restricted Subsidiaries shall
have set aside on its books such reserves as may be required pursuant to
GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, including any Lien securing letters of credit
issued in the ordinary course of business consistent with past practice in
connection therewith, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government contracts,
performance and return-of-money bonds and other similar obligations
(exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company or
any of the Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or assets
which is not leased property subject to such Capitalized Lease Obligation;
(vii) purchase money Liens to finance property or assets of the Company
or any Restricted Subsidiary acquired after the Issue Date; provided,
however, that (A) the related purchase money Indebtedness shall not exceed
the cost of such property or assets and shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets so acquired and (B) the Lien securing such Indebtedness
shall be created within 90 days of such acquisition;
(viii) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(ix) Liens securing reimbursement obligations with respect to commercial
letters of credit which encumber documents and other property relating to
such letters of credit and products and proceeds thereof;
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(x) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual, or warranty requirements of the Company
or any of the Restricted Subsidiaries, including rights of offset and
set-off;
(xi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Indebtedness under Currency Agreements; and
(xiii) Liens securing Acquired Indebtedness incurred in accordance with
the covenant described under "--Certain Covenants--Limitation on Incurrence
of Additional Indebtedness"; provided that (A) such Liens secured such
Acquired Indebtedness at the time of and prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and were not
granted in connection with, or in anticipation of, the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary and (B) such
Liens do not extend to or cover any property or assets of the Company or of
any of the Restricted Subsidiaries other than the property or assets that
secured the Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary and are no
more favorable to the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired Indebtedness by the
Company or a Restricted Subsidiary.
"Person" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company or its
Restricted Subsidiaries incurred for the purpose of financing all or any part of
the purchase price or the cost of installation, construction or improvement of
any property.
"Public Equity Offering" has the meaning set forth under
"--Redemption--Optional Redemption Upon Public Equity Offerings."
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Reference Date" has the meaning set forth under "--Certain
Covenants--Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a
security or Indebtedness in exchange or replacement for, such security or
Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have
correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of Indebtedness incurred in accordance with the covenant
described under "--Certain Covenants--Limitation on Incurrence of Additional
Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii),
(viii), (ix), (x) or (xii) of the definition of Permitted Indebtedness), in each
case that does not (1) result in an increase in the aggregate principal amount
of Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company or any Restricted Subsidiary in connection with such Refinancing)
or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is
less than the Weighted Average Life to Maturity of the Indebtedness being
Refinanced or (B) a final maturity earlier than the final maturity of the
Indebtedness being Refinanced; provided that (x) if such Indebtedness being
Refinanced is Indebtedness of the Company or a Guarantor, then such Refinancing
Indebtedness shall be Indebtedness solely of the
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Company or such Guarantor, as the case may be, and (y) if such Indebtedness
being Refinanced is subordinate or junior to the Notes, then such Refinancing
Indebtedness shall be subordinate to the Notes at least to the same extent and
in the same manner as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date between the Company and the Initial Purchaser.
"Replacement Assets" means assets of a kind used or usable in the business
of the Company and its Restricted Subsidiaries as conducted on the date of the
relevant Asset Sale.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "--Certain Covenants-- Limitation
on Designations of Unrestricted Subsidiaries." Any such Designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of
Regulation S- X under the Securities Act.
"Subsidiary", with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Surviving Entity" has the meaning set forth under "--Certain
Covenants--Merger, Consolidation and Sale of Assets."
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with the covenant described under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities (other than in the case of a foreign
Restricted Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable law) are
owned by the Company or another Wholly Owned Restricted Subsidiary.
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THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration date" means 5:00 P.M., New
York City time, on , 1997; PROVIDED, HOWEVER, that if the Company has extended
the period of time for which the Exchange Offer is open, the term "Expiration
Date" means the latest time and date to which the Exchange Offer is extended.
As of the date of this Prospectus, $85.0 million aggregate principal amount
of the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about 1997, to all holders of Old
Notes known to the Company. The Company's obligation to accept Old Notes for
exchange pursuant to the Exchange offer is subject to certain conditions as set
forth under "--Certain Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for any exchange of any Old Notes, by giving notice of
such extension to the holders thereof. During any such extension, all Old Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Old Notes not accepted for exchange
for any reason will be returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "--Certain Conditions to the Exchange Offer." The Company
will give notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the case
of any extension to be issued no later than 9:00 A.M., New York City time, on
the next business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to United States Trust Company of New
York (the "Exchange Agent") at one of the addresses set forth below under
"Exchange Agent" on or prior to the Expiration Date. In addition either (i)
certificates for such Old Notes must be received by the Exchange Agent along
with the Letter of Transmittal or (ii) a timely confirmation of a book-entry
transfer (a "Book-Entry Confirmation") of such Old Notes, if such procedure is
available, into the Exchange Agent's account at The Depository Trust Company
(the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTER OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDER, IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL
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CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS
OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by registered holder of the Old Notes who has
not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures are
required to be guaranteed, such guarantees must be by a firm that is a member or
participant in the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program or the Stock Exchange Medallion
Program or by an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (collectively, "Eligible Institutions"). If Old
Notes are registered in the name of a person other than a signer of the Letter
of Transmittal, the Old Notes surrendered for exchange must be endorsed by or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by, the registered holder with the signature thereon guaranteed by an
Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to waive
any defects or irregularities or conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date. The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Old Notes for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification. The Exchange Offer is subject to certain customary
conditions relating to compliance with any applicable law, or any applicable
interpretation by any staff of the Commission, or any order of any governmental
agency or court of law. See "--Certain Conditions to the Exchange Offer".
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
do so must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being obtained
in the ordinary course of business of the holder and any beneficial holder, that
neither the holder nor any such beneficial holder has an arrangement or
understanding with any person to participate in the distribution of such New
Notes and that neither the holder nor any such person is an "affiliate," as
defined under Rule 405 of the Securities Act of the Company. If the holder is a
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer, it must acknowledge that it acquired the Old Notes for its own
account as the result of market-making activities or other trading activities,
and must agree that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. For purposes of the Exchange Offer, the
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Company shall be deemed to have accepted properly tendered Old Notes for
exchange when and if the Company has given oral and written notice thereof to
the Exchange Agent.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's accountant the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal and all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of Old
Notes tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, such non-exchanged Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility) as promptly as practicable
after the expiration of the Exchange Offer.
BOOK-ENTRY TRANSFER
Any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "Exchange Agent" on or prior to the Expiration
Date or the guaranteed deliver procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be affected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram ,telex,
facsimile and transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old Notes,
in proper form for transfer or a confirmation of book-entry transfer of such Old
Notes into the Exchange Agent's account at the Book-Entry Transfer Facility (a
"Book-Entry Confirmation"), as the case may be ,and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within five NYSE trading days after the date of
execution of the Notice of Guaranteed Delivery.
WITHDRAWAL OF TENDERS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M., New
York City time on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "Exchange Agent." Any such notice of
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withdrawal must specify the name of the person having tendered the Old Notes to
be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing holder must also submit the
serial number of the particular certificates to be withdrawn and a signed notice
of withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Old Notes have been tendered pursuant to
the procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange which are not exchanged for any reason will be returned to the holder
thereof without cost to such holder (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book entry transfer described above, such Old Notes
will be credited to an account maintained with such Book-Entry Transfer Facility
for the Old Notes) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures for
Tendering Old Notes" above at any time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company shall
not be required to accept for exchange, or to issue New Notes in exchange for,
any Old Notes and may terminate or amend the Exchange Offer if at any time
before the Expiration Date, the Company determines that the Exchange Offer
violates applicable law, any applicable interpretation of the staff of the
Commission or any order of any governmental agency or court of competent
jurisdiction.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its reasonable discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
such right and each such right shall be deemed an ongoing right which may be
asserted at any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
prior to the Expiration Date any stop order shall be threatened or in effect
with respect to the Registration Statement of which this Prospectus constitutes
a part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "TIA"). In any such event, the Company is required to use
every reasonable effort to obtain the withdrawal of any stop order at the
earliest possible time.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as the Exchange
Agent for the Exchange Offer. All executed Letters of Transmittal should be
directed to the Exchange Agent at the address set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or of
the Letter of Transmittal and requests for Notices of Guaranteed Delivery should
be directed to the Exchange Agent addressed as follows:
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United States Trust
Company of New York
114 West 47 Street
New York, NY 10036
Via Facsimile: (212) 852-1626
Confirm by Telephone: (212) 852-1614
For Information: (212) 858-2103
DELIVERY OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers or other
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The expenses to be incurred in connection with the Exchange Officer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs among others.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is the principal amount as reflected in the Company's accounting records
on the date of the exchange. Accordingly, no gain or loss for accounting
purposes will be recognized. The expenses of the Exchange Offer will be
capitalized for accounting purposes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE; RESALES OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from, or
in transactions not subject to, the registration requirements of, the Securities
Act and applicable state securities law. Old Notes not exchanged pursuant to the
Exchange Offer will continue to accrue interest at 11% per annum and will
otherwise remain outstanding in accordance with their terms. Holders of Old
Notes do not have any appraisal or dissenters' rights under the Delaware General
Corporation Law in connection with the Exchange Offer. In general, the Old Notes
may not be offered or sold unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. To the extent that Old
Notes are exchanged for New Notes, the market for the Old Notes may be adversely
affected. The Company does not currently anticipate that it will registered the
Old Notes under the Securities Act. However, (i) if the Initial Purchasers so
request with respect to Old Notes not eligible to be exchanged for New Notes in
the Exchange Offer and held by them following consummation of the Exchange Offer
or (ii) if any holder of Old Notes is not eligible to participate in the
Exchange Offer, or, in the case of any holder of Old Notes
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that participates in the Exchange Offer, does not receive freely tradable New
Notes in exchange for Old Notes, the Company is obligated to file a Registration
Statement on the appropriate form under the Securities Act relating to the Old
Notes held by such persons.
Based on certain interpretive letters issue by the staff of the Commission
to third parties in unrelated transactions (including, without limitation, the
letters of the Commission to (i) Exxon Capital Holdings Corporation, available
May 13, 1988, (ii) Morgan Stanley & Co., Inc., available June 5, 1991 and (iii)
Shearman & Sterling, available July 2, 1993), it is the Company's view that New
Notes issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than (i) any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) any broker-dealer that purchases Notes from the Company
to resell pursuant to Rule 144A or any other available exemption) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no intention, or any arrangement
or understanding with any person, to participate in the distribution of such New
Notes. If any holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff of
the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. A broker-dealer who holds Old Notes that were acquired for
its own account as a result of market-making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and must,
therefore, deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of New Notes. Each such broker-dealer that
acquired New Notes as a result of market-making activities or other trading
activities, must acknowledge in the Letter of Transmittal that it will delivery
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
In addition, to comply with the securities laws of certain jurisdictions, if
applicable, the New Notes may not be offered or sold unless they have been
registered or qualified for sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. The Company has
agreed, pursuant to the Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify the New Notes for offer or
sale under the securities or blue sky laws of such jurisdictions as any holder
of the Notes reasonably requests in writing.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of certain material United States federal
income tax consequences of the acquisition, ownership and disposition of the
Notes. Unless otherwise stated, this discussion is limited to the tax
consequences to those persons who are original owners of the Notes and who hold
such Notes as capital assets. As used in this discussion, a "U.S. Holder" means
any beneficial owner of a Note that is for United States federal income tax
purposes (i) a citizen or resident of the United States, (ii) a corporation
created or organized under the laws of the United States or of any political
subdivision thereof or (iii) a person otherwise subject to United States federal
income taxation on its worldwide income regardless of the sources of such
income. This discussion does not address specific tax consequences that may be
relevant to particular persons (including, for example, foreign persons,
financial institutions, broker-dealers, insurance companies, tax-exempt
organizations, and persons in special situations, such as those who hold Notes
as part of a straddle, hedge, conversion transaction, or other integrated
investment) except where otherwise specifically stated. This discussion does not
address the tax consequences to persons that have a functional currency other
than the United States dollar. In addition, this discussion does not address
United States federal alternative minimum tax consequences or any aspect of
state, local or foreign taxation. This discussion is based upon the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury Department
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change, possibly on a
retroactive basis.
PROSPECTIVE TENDERERS OF THE OLD NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO THEM OF
ACQUIRING, OWNING AND DISPOSING OF THE NOTES, AS WELL AS THE APPLICATION OF
STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
DEBT CHARACTERIZATION AND INTEREST INCOME
The Company and each Holder will agree to treat the Notes as indebtedness
for federal income tax purposes, and the following discussion assumes that such
treatment is correct. If the Notes were not respected as debt, they likely would
be treated as equity ownership interests in the Company. In such event, the
Company would not be entitled to claim a deduction for interest payable on the
Notes. As a result, the Company's after-tax cash flow and, consequently, its
ability to make payments with respect to the Notes could be reduced.
A Holder will recognize ordinary income when it receives or accrues interest
on the Notes in accordance with such Holder's method of tax accounting. A Holder
may be entitled to treat interest income on the Notes as "investment income" for
purposes of computing certain limitations concerning the deductibility of
investment interest expense.
The Notes are not expected to be issued with "original issue discount"
within the meaning of Section 1273 of the Code ("OID"). A Holder who purchases a
Note after the initial distribution thereof at a discount that exceeds a
statutorily defined de minimus amount will be subject to the "market discount"
rules of the Code, and a Holder who purchases a Note at a premium will be
subject to the bond premium
amortization rules of the Code.
DISPOSITION OF NOTES
Upon the sale, exchange or retirement of a Note, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
the sale, exchange or retirement (other than amounts representing accrued and
unpaid interest) and such Holder's adjusted tax basis in the Note. A U.S.
Holder's adjusted tax basis in a Note will be equal to such Holder's cost for
the Note, (i) increased by any interest that has accrued on the Note since the
last interest payment date, as well as any OID, market discount and gain
previously included by such Holder in income with respect to the Note, and (ii)
decreased by any bond premium previously amortized and any principal payments
previously received
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by such Holder with respect to such Note. Subject to the market discount rules,
any such gain or loss will be capital gain or loss, long- or short-term
depending upon whether the U.S. Holder has held the Note for more than one year.
Subject to certain limited exceptions, capital losses cannot be used to offset
ordinary income.
A cash basis holder that sells a Note between interest payment dates will be
required to treat an amount equal to accrued but unpaid interest through the
date of sale as ordinary interest income, and to add such amount to its basis in
the Offered Note.
THE EXCHANGE BY A U.S. HOLDER OF AN OLD NOTE FOR A NEW NOTE PURSUANT
TO THE EXCHANGE OFFER SHOULD NOT CONSTITUTE A TAXABLE EXCHANGE.
TAX CONSEQUENCES TO FOREIGN HOLDERS
For purposes of this discussion, a "Foreign Holder" is any beneficial owner
that is not a U.S. Holder, and a "Holder" is any U.S. Holder or Foreign Holder.
A Foreign Holder generally will not be subject to United States federal
income taxes on payments of principal or interest on the Notes so long as the
Foreign Holder (i) is not actually or constructively a "10 percent shareholder"
of the Company or a "controlled foreign corporation" with respect to which the
Company is "related" (directly or indirectly) through stock ownership within the
meaning of the Code, and (ii) provides an appropriate statement, signed under
penalties of perjury, certifying that the beneficial owner of the Note is a
foreign person and providing that foreign person's name and address. If the
information provided in this statement changes, the foreign person must so
inform the Company within 30 days of such change. The statement generally must
be provided in the year a payment of principal or interest occurs or in either
of the two preceding years. If the foregoing conditions are not satisfied, then
interest paid on the Notes will be subject to United States withholding tax at a
rate of 30 percent, unless such rate is reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain a Foreign Holder realizes on the sale, redemption,
retirement or other taxable disposition of an Offered Note will be exempt from
United States federal income and withholding tax, provided that (i) the gain is
not effectively connected with the Foreign Holder's conduct of a trade or
business in the United States, and (ii) in the case of a Foreign Holder that is
an individual, the Foreign Holder is not present in the United States for 183
days or more in the taxable year.
If the interest gain or other income a Foreign Holder recognizes on an
Offered Note is effectively connected with the Foreign Holder's conduct of a
trade or business in the United States, the Foreign Holder (although exempt from
the withholding tax previously discussed if an appropriate statement is
furnished) generally will be subject to United States federal income tax on the
interest, gain or other income at regular federal income tax rates. In addition,
if the Foreign Holder is a foreign corporation, it may be subject to a branch
profits tax equal to 30 percent of its "effectively connected earnings and
profits", as adjusted for certain items, unless it qualifies for a lower rate
under an applicable tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will be required to report annually to the IRS and to each
Holder of record, the amount of interest paid on the Offered Notes (and the
amount of interest withheld for federal income taxes, if any) for each calender
year, except as to certain Holders (generally, corporations, tax-exempt
organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to their
status). Each Holder (other than Holders who are not subject to the reporting
requirements) will be required to provide to the Company, under penalties of
perjury, certain information relating to backup withholding. Should a Holder
that is required to provide such information fail to do so, the Company will be
required to withhold 31% of the interest otherwise payable to such
78
<PAGE>
Holder and to remit the withheld amount to the IRS as a credit against the
Holder's federal income tax liability.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a Prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer to use in connection with any such resale. In
addition, until , 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the New Notes may be required to deliver a
Prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on such resale of New Notes and any commissions or
concessions received by any such person may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a Prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to an Broker-Dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including expenses of one counsel for the
holders of the Old Notes) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Old Notes (including any
Broker-Dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for the
Company by Kirkland & Ellis, New York, New York.
EXPERTS
The consolidated balance sheets as of May 31, 1997 and 1996, the
consolidated statements of operations, stockholders' equity (deficit) and cash
flows, and the financial statement schedule for each of the three years in the
period ended May 31, 1997, included in this Registration Statement, have been
included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (the "Exchange Offer
Registration Statement," which term shall
79
<PAGE>
encompass all amendments, exhibits, annexes and schedules thereto) pursuant to
the Securities Act, and the rules and regulations promulgated thereunder,
covering the New Notes being offered hereby. This Prospectus does not contain
all the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company, and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such Statement shall be
deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional
Offices of the Commission at Seven World Trade Center, Suite 1300, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such Web site is:
http://www.sec.gov.
As a result of the Exchange Offer, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. In the event the
Company ceases to be subject to the informational requirements of the Exchange
Act, the Company will be required under the Indenture to continue to file with
the Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the information requirements of the Exchange
Act. The Company will also furnish such other reports as may be required by law.
80
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of independent accountants.......................................................................... F-2
Consolidated balance sheets at May 31, 1996 and 1997
and (unaudited) at August 31, 1997....................................................................... F-3
Consolidated statements of operations for the years ended
May 31, 1995, 1996, and 1997............................................................................. F-4
Consolidated statements of operations (unaudited)
for the three months ended August 31, 1996, and 1997..................................................... F-5
Consolidated statements of stockholders' equity (deficit)
for the years ended May 31, 1995, 1996, and 1997 and
(unaudited) for the three months ended August 31, 1997................................................... F-6
Consolidated statements of cash flows for the years
ended May 31, 1995, 1996 and 1997........................................................................ F-7
Consolidated statements of cash flows (unaudited)
for the three months ended August 31, 1996, and 1997..................................................... F-8
Notes to consolidated financial statements................................................................. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Town Sports International, Inc.:
We have audited the accompanying consolidated balance sheets of TOWN SPORTS
INTERNATIONAL, INC. and SUBSIDIARIES as of May 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended May 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Town Sports
International, Inc. and Subsidiaries as of May 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended May 31, 1997, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
July 24, 1997.
F-2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 AND 1997 AND AUGUST 31, 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
-------------------- -------------
1996 1997 1997
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS:
Current assets:
Cash and cash equivalents....................................................... $ 928 $ 2,468 $ 702
Accounts receivable............................................................. 485 228 292
Inventory....................................................................... 288 327 403
Prepaid expenses................................................................ 881 448 715
Prepaid corporate income taxes.................................................. 358 202 --
Advances to, and amounts due from, affiliated companies......................... 539 129 289
--------- --------- -------------
Total current assets.......................................................... 3,479 3,802 2,401
Fixed assets, net................................................................. 23,634 34,214 37,848
Investments in, and amounts due from, affiliated companies........................ 350 420 27
Intangible assets, net............................................................ 372 4,425 5,079
Deferred tax asset................................................................ 3,914 5,972 6,225
Deferred membership costs......................................................... 2,683 3,530 3,835
Other assets...................................................................... 373 456 459
--------- --------- -------------
Total assets.................................................................. $ 34,805 $ 52,819 $ 55,874
--------- --------- -------------
--------- --------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt and capital lease obligations................. $ 1,318 $ 1,924 $ 3,178
Accounts payable and accrued expenses........................................... 3,207 5,715 4,455
Deferred revenue................................................................ 3,002 4,599 4,889
--------- --------- -------------
Total current liabilities..................................................... 7,527 12,238 12,522
Long-term debt and capital lease obligations...................................... 9,135 39,147 40,727
Deferred lease liabilities........................................................ 4,989 6,625 7,111
Deferred revenue.................................................................. 813 1,036 1,063
Other liabilities................................................................. 746 724 716
--------- --------- -------------
Total liabilities............................................................. 23,210 59,770 62,139
--------- --------- -------------
Commitments and contingencies (Notes 6, 7, 8 and 13)
Series B redeemable, convertible, preferred stock, $.01 par value; authorized
368,333 shares issued and outstanding at May 31, 1996........................... 6,121 -- --
--------- --------- -------------
Stockholders' equity (deficit):
Series A preferred stock, $1.00 par value; at liquidation value; authorized
200,000 shares, 152,455 shares issued and outstanding at May 31 and August 31,
1997............................................................................ -- 16,250 16,784
Series A preferred stock, $.10 par value; $496 liquidation value; 496 shares
issued and outstanding at May 31, 1996.......................................... -- -- --
Series B preferred stock, $1.00 par value; at liquidation value; authorized
200,000 shares, 3,857 issued and outstanding at May 31 and August 31, 1997...... -- 144 148
Class A voting common stock, $.001 par value; authorized 1,150,000 shares,
1,010,000 issued and outstanding at May 31 and August 31, 1997.................. -- 1 1
Class A voting common stock, $.01 par value; 576,306 shares issued and outstanding
at May 31, 1996................................................................. 6 -- --
Class B non-voting common stock, $.01 par value; authorized 500,000 shares, none
issued and outstanding.......................................................... -- -- --
Class B convertible non-voting common stock, $.01 par value; 2,351 shares issued
and outstanding at May 31, 1996................................................. -- -- --
Paid-in capital................................................................... 5,126 -- 160
Retained earnings (accumulated deficit)........................................... 342 (23,346) (23,358)
--------- --------- -------------
Total stockholders' equity (deficit).......................................... 5,474 (6,951) (6,265)
--------- --------- -------------
Total liabilities and stockholders' equity (deficit).......................... $ 34,805 $ 52,819 $ 55,874
--------- --------- -------------
--------- --------- -------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Club operations.............................................................. $ 30,438 $ 40,796 $ 54,164
Management fees.............................................................. 1,810 1,746 1,288
Rental income................................................................ 831 882 936
Share of net income in affiliated companies.................................. 270 331 179
--------- --------- ----------
33,349 43,755 56,567
--------- --------- ----------
Operating expenses:
Payroll and related.......................................................... 16,105 18,626 23,321
Compensation expense incurred in connection with stock options............... 635 1,967 5,933
Club operating............................................................... 11,740 14,542 18,044
General and administrative................................................... 3,321 3,562 3,774
Depreciation and amortization................................................ 2,168 2,929 4,219
--------- --------- ----------
33,969 41,626 55,291
--------- --------- ----------
Operating Income (loss).................................................... (620) 2,129 1,276
Interest expense, net of interest income of $28 in 1995, $60 in 1996 and $115
in 1997...................................................................... 654 952 2,455
--------- --------- ----------
Income (loss) before provision (benefit) for corporate income taxes........ (1,274) 1,177 (1,179)
Provision (benefit) for corporate income taxes................................. (541) 628 (243)
--------- --------- ----------
Net income (loss).......................................................... (733) 549 (936)
Accreted dividends on preferred stock.......................................... (258) (400) (1,286)
--------- --------- ----------
Net income (loss) to common stockholders................................... $ (991) $ 149 $ (2,222)
--------- --------- ----------
--------- --------- ----------
Pro forma per common share data (unaudited):
Net (loss) per common share................................................ $ (2.20)
----------
----------
Weighted average number of common shares outstanding....................... 1,010,000
----------
----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
<S> <C> <C>
1996 1997
----------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Revenues:
Club operations...................................................................... $ 11,757 $ 16,528
Management fees...................................................................... 327 366
Rental income........................................................................ 220 239
Share of net income in affiliated companies.......................................... 71 65
----------- -----------
12,375 17,198
----------- -----------
Operating expenses:
Payroll and related.................................................................. 5,220 7,035
Compensation expense incurred in connection with stock options....................... 450 160
Club operating....................................................................... 3,651 5,230
General and administrative........................................................... 1,023 1,064
Depreciation and amortization........................................................ 889 1,589
----------- -----------
11,233 15,078
----------- -----------
Operating Income................................................................... 1,142 2,120
Interest expense, net of interest income of $19 in 1996 and $29 in 1997................ 184 1,144
----------- -----------
Income before provision for corporate income taxes................................. 958 976
Provision for corporate income taxes................................................... 475 450
----------- -----------
Net income............................................................................. 483 526
Accreted dividends on preferred stock.................................................. (100) (538)
----------- -----------
Net income (loss) to common stockholders........................................... $ 383 $ (12)
----------- -----------
----------- -----------
Pro forma per common share data:
Net (loss) per common share........................................................ $ (.01)
-----------
-----------
Weighted average number of common shares outstanding............................... 1,010,000
</TABLE>
See notes to consolidated financial statements.
F-5
<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, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED
AUGUST 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------
SERIES A SERIES
($1.00 PAR) A ($.10 PAR) SERIES B
-------------------- ------------------------ -----------
SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1994........................................ 496
Accretion of Series B redeemable convertible preferred stock
dividends ($.79 per share)...................................
Increase in stockholders' equity related to compensation
expense incurred in connection with stock options............
Net loss.......................................................
--------- --------- --- ----------- -----
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... (496)
Redemption of Series B Preferred and Class A and B Common Stock
for a cash price of $35 per share............................
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
Warrant exercise at $.01 per share.............................
Original issue discount in connection with the issuance of
warrants and subordinated debt...............................
Change in equity related to exercise of stock options..........
Compensation expense incurred in connection with stock
options......................................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively.)................... 1,005
Net loss.......................................................
--------- --------- --- ----------- -----
Balance at May 31, 1997........................................ 152,455 16,250 3,857
Compensation expense incurred in connection with stock options
(unaudited)..................................................
Accretion of Series A and Series B preferred stock dividend
($3.50 and $1.04 per share, respectively) (unaudited)........ 534
Net income (unaudited).........................................
--------- --------- --- ----------- -----
Balance at August 31, 1997 (unaudited)......................... 152,455 $ 16,784 -- -- 3,857
--------- --------- --- ----------- -----
--------- --------- --- ----------- -----
<CAPTION>
COMMON STOCK
-------------------------------------------------
CLASS A CLASS A
($.001 PAR) ($.01 PAR)
------------------------- ----------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1994........................................ 475,000 $ 5
Accretion of Series B redeemable convertible preferred stock
dividends ($.79 per share)...................................
Increase in stockholders' equity related to compensation
expense incurred in connection with stock options............
Net loss.......................................................
-- --
----- ---------- ---------
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
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
Liquidation of Series A Preferred Stock for $1,000 per share...
Redemption of Series B Preferred and Class A and B Common Stock
for a cash price of $35 per share............................ (576,306) (6)
Issuance of Series A and B Preferred and Common Stock at cash
price of $100, $35 and $1, respectively...................... $ 135 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...............................
Change in equity related to exercise of stock options..........
Compensation expense incurred in connection with stock
options......................................................
Accretion of Series A and Series B preferred stock dividend
($6.59 and $2.32 per share, respectively.)................... 9
Net loss.......................................................
-- --
----- ---------- ---------
Balance at May 31, 1997........................................ 144 1,010,000 1
Compensation expense incurred in connection with stock options
(unaudited)..................................................
Accretion of Series A and Series B preferred stock dividend
($3.50 and $1.04 per share, respectively) (unaudited)........ 4
Net income (unaudited).........................................
-- --
----- ---------- ---------
Balance at August 31, 1997 (unaudited)......................... $ 148 1,010,000 $ 1 -- --
-- --
-- --
----- ---------- ---------
----- ---------- ---------
<CAPTION>
CLASS B CONVERTIBLE RETAINED TOTAL
EARNINGS STOCKHOLDERS'
---------------------- PAID-IN (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT) (DEFICIT)
--------- ----------- --------- ------------ ------------
Balance at May 31, 1994........................................ $ 1,154 $ 1,184 $ 2,343
Accretion of Series B redeemable convertible preferred stock
dividends ($.79 per share)................................... (258) (258)
Increase in stockholders' equity related to compensation
expense incurred in connection with stock options............ 634 634
Net loss....................................................... (733) (733)
--------- --- --------- ------------ ------------
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......................... 2,351 144 144
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........................................ 2,351 5,126 342 5,474
Liquidation of Series A Preferred Stock for $1,000 per share... (496) (496)
Redemption of Series B Preferred and Class A and B Common Stock
for a cash price of $35 per share............................ (2,351) (6,553) (21,466) (28,025)
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
Change in equity related to exercise of stock options.......... (4,179) (4,179)
Compensation expense incurred in connection with stock
options...................................................... 5,933 5,933
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)
Compensation expense incurred in connection with stock options
(unaudited).................................................. 160 160
Accretion of Series A and Series B preferred stock dividend
($3.50 and $1.04 per share, respectively) (unaudited)........ (538)
Net income (unaudited)......................................... 526 526
--------- --- --------- ------------ ------------
Balance at August 31, 1997 (unaudited)......................... -- -- $ 160 $ (23,358) $ (6,265)
--------- --- --------- ------------ ------------
--------- --- --------- ------------ ------------
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................................................... $ (733) $ 549 $ (936)
--------- --------- ----------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization................................................ 2,168 2,929 4,219
Noncash compensation expense................................................. 635 1,967 5,933
Noncash rental expense, net of noncash rental income......................... 1,232 1,277 1,620
Share of net income in affiliated companies.................................. (270) (331) (179)
Amortization of debt issuance costs.......................................... -- -- 156
Change in certain working capital components................................. 1,882 1,454 4,101
Increase in deferred tax asset............................................... (1,496) (1,539) (2,058)
Increase in deferred membership costs........................................ (454) (926) (847)
Other........................................................................ 319 315 --
--------- --------- ----------
Total adjustments.......................................................... 4,016 5,146 12,945
--------- --------- ----------
Net cash provided by operating activities.................................. 3,283 5,695 12,009
--------- --------- ----------
Cash flows from investing activities:
Capital expenditures, net of effect of acquired businesses................... (7,670) (5,380) (11,110)
Acquisition of businesses.................................................... (3) (35) (1,888)
Intangible and other assets.................................................. -- (72) (280)
--------- --------- ----------
Net cash used in investing activities...................................... (7,673) (5,487) (13,278)
--------- --------- ----------
Cash flows from financing activities:
Issuance of stock, net of expenses........................................... 4,835 2,000 15,155
Redemption and liquidation of stock, including expenses...................... -- -- (38,820)
Proceeds from borrowings..................................................... 5,938 5,365 42,092
Repayments of borrowings..................................................... (7,029) (7,221) (13,607)
Landlord payment for tenant improvements..................................... 500 -- --
Debt issuance costs.......................................................... -- -- (2,011)
--------- --------- ----------
Net cash provided by financing activities.................................. 4,244 144 2,809
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents....................... (146) 352 1,540
Cash and cash equivalents at beginning of period................................. 722 576 928
--------- --------- ----------
Cash and cash equivalents at end of period....................................... $ 576 $ 928 $ 2,468
--------- --------- ----------
--------- --------- ----------
Summary of the change in certain working capital components, net of effects of
acquired businesses:
Decrease in accounts receivable.............................................. $ 307 $ 23 $ 257
Increase in inventory........................................................ (31) (135) (39)
Decrease (increase) in prepaid expenses...................................... (142) (188) 433
Decrease in amounts due from affiliated companies............................ 61 346 519
Increase in accounts payable and accrued expenses............................ 109 805 1,658
(Decrease) increase in prepaid corporate income taxes........................ 503 (913) 156
Increase in deferred revenue................................................. 1,075 1,516 1,117
--------- --------- ----------
Net change in working capital.............................................. $ 1,882 $ 1,454 $ 4,101
--------- --------- ----------
--------- --------- ----------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED AUGUST 31, 1996 AND 1997
ALL FIGURES $'000, EXCEPT SHARE DATA INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
<TABLE>
<CAPTION>
AUGUST 31,
------------------------
<S> <C> <C>
1996 1997
(UNAUDITED) (UNAUDITED)
----------- -----------
Cash flows from operating activities:
Net income....................................................................... $ 483 $ 526
----------- -----------
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 889 1,589
Noncash compensation expense....................................................... 450 160
Noncash rental expense, net of noncash rental income............................... 275 486
Share of net income in affiliated companies........................................ (71) (65)
Amortization of debt issuance costs................................................ -- 78
Change in certain working capital components....................................... (848) (1,387)
Increase in deferred tax asset..................................................... (418) (253)
Increase in deferred membership costs.............................................. (286) (305)
Other.............................................................................. 11 (10)
----------- -----------
Total adjustments................................................................ 2 293
----------- -----------
Net cash provided by operating activities........................................ 485 819
----------- -----------
Cash flows from investing activities:
Capital expenditures, net of effect of acquired businesses......................... (1,187) (1,303)
Acquisition of businesses.......................................................... -- (2,170)
Intangible and other assets........................................................ (14) --
----------- -----------
Net cash used in investing activities............................................ (1,201) (3,473)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings........................................................... 1,412 1,587
Repayments of borrowings........................................................... (1,134) (699)
----------- -----------
Net cash provided by financing activities........................................ 278 888
----------- -----------
Net decrease in cash and cash equivalents........................................ (438) (1,766)
----------- -----------
Cash and cash equivalents at beginning of period....................................... 928 2,468
----------- -----------
Cash and cash equivalents at end of period....................................... $ 490 $ 702
----------- -----------
----------- -----------
Summary of the change in certain working capital components, net of effects of acquired
businesses:
Decrease (increase) in accounts receivable......................................... $ 384 $ (64)
Increase in inventory.............................................................. (23) (76)
Decrease (increase) in prepaid expenses............................................ 38 (267)
(Increase) decrease in amounts due from affiliated companies....................... (33) 298
Decrease in accounts payable and accrued expenses.................................. (2,147) (2,198)
Increase in prepaid corporate income taxes......................................... 513 603
Increase in deferred revenue....................................................... 420 317
----------- -----------
Net change working capital....................................................... $ (848) $ (1,387)
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-8
<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 and
operates twenty-seven fitness clubs ("clubs") and a physical therapy facility in
the New York metropolitan market, five clubs in Washington, D.C., one club in
Boston, and two clubs in Switzerland. The Company's geographic concentration in
the New York metropolitan market may expose the Company to adverse developments
related to competition, demographic changes and economic down turns.
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 to reflect a liquidation, and redemption of stock
and stock options outstanding immediately prior to the recapitalization. In
addition, 368,333 shares of Series B Redeemable Preferred Stock 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. 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 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.
In connection with advance receipts of fees or dues, the Company is required
to maintain surety bonds totaling $650, pursuant to various state consumer
protection laws.
Management fees earned for services rendered are recognized at the time the
related services are performed.
C. 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.
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)
D. 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
E. 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 year end May 31, 1995, 1996 and 1997 totaled $1,227, $1,291
and $1,627, respectively.
F. 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 of
fixed and intangible assets, deferred income tax valuation and compensation
expense incurred in connection with stock options.
G. CORPORATE INCOME TAXES:
The Company provides for corporate income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). SFAS No. 109 requires recognition of deferred tax liabilities and
assets 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 the
temporary differences are expected to reverse.
F-10
<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)
H. STATEMENTS OF CASH FLOWS:
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
MAY 31, AUGUST 31
------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- ------------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest (net of amounts capitalized)................... $ 610 $ 1,118 $ 1,603 $ 184 $ 1,465
Taxes................................................... 352 3,080 1,655 310 99
Noncash investing and financing activities:
Acquisition of fixed assets included in accounts
payable............................................... 171 293 850 972 536
Acquisition of equipment financed by suppliers or
lessors............................................... 1,110 1,475 1,411 19 --
See Notes 9 and 10 for additional noncash investing and
financing activities.
</TABLE>
I. 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.
J. DEFERRED LEASE LIABILITIES AND NONCASH RENTAL EXPENSE:
The Company recognizes rental expense from leases with scheduled rent
increases on the straight-line basis.
K. 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.
During the years ended May 31, 1995 and 1996, the Company recognized foreign
exchange gains of $60 and $20, respectively. During the year ended May 31, 1997,
the Company recognized a foreign exchange loss of $65. These gains and loss
relate to certain management fees earned in Switzerland.
L. INVESTMENTS IN AFFILIATED COMPANIES:
The Company, through various subsidiaries, has made investments in entities
whose operations are similar to, or related to, those of the Company. Ownership
interests are accounted for by the equity method.
M. INTANGIBLE ASSETS:
Intangible assets consist of acquired leasehold rights, membership lists,
debt issuance costs, goodwill and organizational expenses. Such intangibles,
except debt issuance costs, are stated at amortized cost and are being amortized
by the straight-line method over their estimated lives. Debt issuance costs are
F-11
<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)
amortized using the interest method. The membership lists are being amortized
over a three-year period. 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, six to nine years. Organizational expenses are being
amortized over a five-year period. The Company evaluates intangible assets,
including goodwill, for impairment at least annually. In completing this
evaluation the Company compares its best estimate of undiscounted future cash
flows with the carrying value of the respective asset.
N. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:
In the current fiscal year the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of", ("SFAS No. 121"). SFAS No. 121
prescribes the accounting for the impairment of long-lived assets, such as
property, plant and equipment and intangible assets, as well as the accounting
for long-lived assets that are held for disposal. The statement requires that
such assets be reviewed when events or circumstances indicate that an impairment
might exist. The adoption of SFAS No. 121 in this fiscal year did not have an
effect on the results of operations or financial position of the Company.
O. 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.
P. STOCK-BASED EMPLOYEE COMPENSATION:
The accompanying financial position and results of operations of the Company
have been prepared in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees ("APB No. 25"). Under APB No. 25, 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, as of the grant date, 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 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. In addition, the fair value of warrants granted to
nonemployees for goods or services are included in operating results as an
expense.
Disclosures required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"), 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.
Q. RECENTLY ISSUED ACCOUNTING STANDARD:
During February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No. 128").
SFAS No. 128 will require the Company to
F-12
<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)
replace the current presentation of the per share data with "basic" and
"diluted" per share. SFAS No. 128 will be adopted by the Company for periods
ending after May 31, 1998, and for all periods presented the Company will
provide "basic" and "diluted" per share data. Based on management's current
estimates, the future adoption of SFAS 128 is not expected to have a material
impact on per share data.
R. PRO FORMA PER COMMON SHARE DATA (UNAUDITED):
The pro forma per common share data included in the statements of operation
has been prepared assuming the leveraged recapitalization discussed in Note 1 to
the financial statements had occurred on June 1, 1996. Accordingly, the pro
forma per common share amounts were computed by dividing the net (loss), after
deduction of the preferred stock dividend, by the issued and outstanding shares
of Class A Voting Common Stock. Such computation also includes, where dilutive,
the weighted average number of shares issuable upon the exercise of outstanding
options and warrants. Since the recapitalization noted above occurred during the
year ended May 31, 1997, per share data prepared in accordance with Accounting
Principles Board Opinion No. 15 Earnings Per Share and SFAS No. 123 has been
omitted as such information is not considered meaningful.
3. FIXED ASSETS:
Fixed assets as of May 31, 1996 and 1997 are shown at cost, less accumulated
depreciation and amortization, and are summarized below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Leasehold improvements.................................................. $ 17,551 $ 26,309
Club equipment.......................................................... 5,895 8,581
Furniture, fixtures and computer equipment.............................. 3,237 5,171
Building and improvements............................................... 4,975 4,995
Land.................................................................... 986 986
Construction in progress................................................ 444 1,284
--------- ---------
33,088 47,326
Less, Accumulated depreciation and amortization......................... 9,454 13,112
--------- ---------
$ 23,634 $ 34,214
--------- ---------
--------- ---------
</TABLE>
Depreciation and leasehold amortization expense for the years ended May 31,
1995, 1996 and 1997 was approximately $2,042, $2,813 and $3,824, respectively.
F-13
<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, 1996 and 1997 are shown at cost, less
accumulated amortization, and are summarized below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Goodwill arising on acquisition of businesses................................ $ 31 $ 2,223
Debt issuance costs.......................................................... 164 2,150
Acquired leasehold rights.................................................... 328 549
Organizational expenses...................................................... 159 184
Membership lists............................................................. 16 176
--------- ---------
698 5,282
Less, Accumulated amortization............................................... 326 857
--------- ---------
$ 372 $ 4,425
--------- ---------
--------- ---------
</TABLE>
Amortization expense for the years ended May 31, 1995, 1996 and 1997 was
approximately $126, $116 and $551, respectively.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<CAPTION>
MAY 31,
-------------------- AUGUST 31,
1996 1997 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable............................................. $ 1,062 $ 1,698 $ 1,142
Accrued payroll.............................................. 794 1,882 995
Accrued interest............................................. 29 839 367
Accrued other................................................ 1,322 1,296 1,951
--------- --------- -----------
$ 3,207 $ 5,715 $ 4,455
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-14
<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>
1996 1997
--------- ---------
<S> <C> <C>
Term loan--Bank, payable in installments of $300 in 1998 and 1999, $4,400 in 2000, $5,000 in
2001 and 2002 and $15,000 in 2003......................................................... $ -- $ 30,000
Subordinated note payable--face value of $7,500, payable in installments of $2,500 in 2004,
2005 and 2006 subordinated to term loan--bank. Note shown net of original issue discount
arising out of issuance of warrants to buy common stock................................... -- 7,384
First mortgage note payable, due December 22, 1999, interest payable quarterly, at a rate of
London Interbank Offered Rate ("LIBOR") plus 1.5% as defined, principal payable in monthly
installments of $15, repaid in year ended May 31, 1997.................................... 5,135 --
Notes payable under the line of credit due various dates within fiscal year-end May 31,
1998, interest payable quarterly, interest accrues at a rate of LIBOR plus 1%, repaid in
year ended May 31, 1997................................................................... 2,750 --
Capital lease obligations................................................................... 2,153 2,317
Notes payable--face value of $1,200, discounted at a rate of 7%, payable in annual
installments of principal and interest of $225 for 1998 and 1999, and $250 for 2000, 2001
and 2002.................................................................................. -- 980
Note payable--face value of $325, discounted at a rate of 6.2% payable in annual
installments of principal and interest of $175 in 1998 and $150 in 1999................... -- 298
Note payable--face value of $205 discounted at a rate of 6.2%, payable in installments of
principal and interest of $70 in 1996 and 1997 and $30 in 1998............................ 157 92
Installment loan--due December 1, 1996, principal payable in monthly installments, plus
interest at a rate of 5.8%................................................................ 175 --
Notes payable--face value at May 31, 1996 of $19, discounted at a rate of 5.7%, repaid in
year ended May 31, 1997................................................................... 19 --
Note payable--interest-bearing at 6.8%, payable in annual installments of principal and
interest of $25 repaid in year ended May 31, 1997......................................... 24 --
Note payable--interest payable monthly at a rate of prime plus 1%, principal payable in
quarterly installments of $10, repaid in year ended May 31, 1997.......................... 40 --
--------- ---------
10,453 41,071
Less, Current portion due within one year............................................... 1,318 1,924
--------- ---------
Long-term portion..................................................................... $ 9,135 $ 39,147
--------- ---------
--------- ---------
</TABLE>
F-15
<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)
The aggregate long-term debt and capital lease obligations maturing during
the next five years is as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, AMOUNT DUE
- -------------------------------------------------------------------------------- ------------
<S> <C>
1998............................................................................ $ 1,924
1999............................................................................ 1,458
2000............................................................................ 4,797
2001............................................................................ 5,262
2002............................................................................ 5,246
Thereafter...................................................................... 22,384
------------
$ 41,071
------------
------------
</TABLE>
As of May 31, 1997, the Company has a line of credit with its principal bank
for direct borrowings and letters of credit of up to $15,000. The line of credit
carries interest at the Company's option based upon the Eurodollar borrowing
rate plus 3.00% or the bank's prime rate plus 2.25%, as defined and the Company
is required to pay a commitment commission of 0.5% per annum based upon the
daily unutilized amount. There were no outstanding borrowings against this line
of credit as of May 31, 1997. The utilization of this facility is governed by
the leverage ratio as defined. The unutilized portion of the line of credit as
of May 31, 1997, was $13,891, of which $10,186 would have been available for
direct borrowings. This line of credit matures May 31, 2002.
The term loan, line of credit and subordinated note payable contain various
covenants including interest and fixed charge coverage, a leverage ratio and
annual limitations on capital expenditures as well as restrictions on the
payment of dividends.
The term loan and line of credit are collateralized by a mortgage on land,
building and equipment, which, as of May 31, 1997, had an aggregate book value
of approximately $3,759, and by all other assets of the Company.
The term loan carries interest based upon Eurodollar borrowing rate plus
3.25%, or the base prime rate plus 2.00%, payable as defined, and was
approximately 9.00% at May 31, 1997.
The subordinated note payable carries interest of 11.5% payable
semi-annually.
As a result of the variable interest charged on the Company's long-term
debt, the carrying value of long-term debt approximates fair market value as of
May 31, 1996 and 1997.
The Company's interest expense and capitalized interest related to club
facilities under construction are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Interest costs expensed............................................ $ 682 $ 1,012 $ 2,570
Interest costs capitalized......................................... 71 46 28
--------- --------- ---------
$ 753 $ 1,058 $ 2,598
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<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)
The Company leases equipment under noncancelable capital leases. Lease terms
range from three to five years, after which the Company is required to purchase
the equipment at amounts defined by the agreements.
As of May 31, 1997, minimum rental payments, under all capital leases,
including payments to acquire leased equipment, are as follows:
<TABLE>
<CAPTION>
MINIMUM
YEAR ENDING MAY 31, ANNUAL RENTAL
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 1,391
1999........................................................................... 875
2000........................................................................... 206
2001........................................................................... 49
2002........................................................................... 13
------
2,534
Less, Amounts representing interest.......................................... (217)
------
Present value of minimum capital lease payments.............................. $ 2,317
------
------
</TABLE>
The cost of leased equipment included in club equipment was approximately
$2,779 and $4,190 at May 31, 1996 and 1997, respectively; related accumulated
depreciation was $559 and $1,283, respectively.
F-17
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
7. INVESTMENTS IN, AND AMOUNTS DUE FROM, AFFILIATED COMPANIES:
Investments in, and amounts due from, affiliated companies as of May 31,
1996 and 1997 consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C> <C>
Investments:
Capitol Hill Squash Club Associates ("CHSCA")............................................. $ 35 $ 39
Kalorama Sports Management Associates ("KSMA")............................................ 14 (31)
--------- ---
49 8
Receivables, payables and advances:
American Fitness Franchise Corp. and its affiliate........................................ -- 150
Great Neck Fitness Club, Ltd. and its affiliate ("GNFC").................................. (a) 319 212
Town Squash AG ("TSAG")--management fees receivable, denominated in Swiss francs.......... (b) 296 84
Mid-Atlantic Fitness Network with interest at 7.5%........................................ 110 76
Kalorama Sports Management Associates, with interest at prime plus 1.5% (10% at May 31,
1997)................................................................................... 40 128
Note due from stockholder, interest at prime plus 2%...................................... 74 --
Capitol Hill Squash Club Associates and its affiliate..................................... 1 (5)
Bruckmann, Rosser, Sherrill & Co., Inc. ("BRS")........................................... (c) -- (104)
--------- ---
889 549
Less, Current portion due within one year................................................. 539 129
--------- ---
$ 350 $ 420
--------- ---
--------- ---
</TABLE>
Summarized selected data of the investees is as follows:
<TABLE>
<CAPTION>
COMPANY'S SHARE
INVESTEE DATA AS OF AND FOR THE YEAR ENDED MAY 31, 1997 OF NET INCOME IN
- ------------------------------------------------------------------------------------------------------------ AFFILIATED
THE COMPANY'S COMPANIES
OWNERSHIP TOTAL ----------------
INVESTEE SEE NOTE PERCENTAGE ASSETS TOTAL LIABILITIES EQUITY NET INCOME 1995 1996 1997
- -------------------------------- -------- ------------- ------ ----------------- ------ ---------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CHSCA........................... (d),(e) 20% $ 508 $ 68 $440 $426 $ 56 $ 71 $ 86
KSMA............................ (d) 42% 1,624 1,313 311 288 214 260 93
---- ---- ----
$270 $331 $179
---- ---- ----
---- ---- ----
</TABLE>
- ------------------------
(a) The Company entered into a management agreement with GNFC. The Company
together with the shareholders of GNFC, is liable to fund shortfalls in
operating cash flows, as defined.
The terms of the agreement provide for the Company to fund a maximum amount
of $250, which is non-interest-bearing and will be repaid out of future
operating cash flows, as defined.
Management fees earned during the year ended May 31, 1996 amounted to
approximately $75. No management fees were recognized as income during the
year ended May 31, 1995 and 1997.
(b) The Company entered into a management agreement with TSAG. The Company,
together with the shareholders of TSAG, is contingently liable to fund
shortfalls in operating cash flow, as defined.
F-18
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
7. INVESTMENTS IN, AND AMOUNTS DUE FROM, AFFILIATED COMPANIES: (CONTINUED)
The terms of the agreement provide for the Company to fund a maximum amount
of operating cash flow of approximately $140 ("Advances"). As of May 31,
1996 and 1997, the Company had no outstanding Advances to TSAG. Amounts due
the Company at May 31, 1996 and 1997 represented earned management fees
payable after year-end.
Management fees earned during the years ended May 31, 1995, 1996 and 1997
amounted to approximately $482, $695 and $223, respectively.
(c) The Company entered into a professional service agreement with 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.
(d) Income and loss allocations to the Company are based on terms defined within
the partnership agreements and may not equal ownership percentages.
(e) Investee earnings exclude management fees earned during each of the years
ended May 31, 1995, 1996 and 1997, which amounted to approximately $67, $67
and $66, respectively.
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 provide for
additional rent based upon defined formulas of revenue, cash flow or operating
results of the respective facilities. Under the provisions of certain of these
leases, the Company is required to maintain irrevocable letters of credit, which
total $1,109.
The leases expire at various times through May 31, 2019, and some may be
extended at the Company's option.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, MINIMUM ANNUAL RENTAL
- --------------------------------------------------------------------- -----------------------
<S> <C>
1998................................................................. $ 8,142
1999................................................................. 9,083
2000................................................................. 9,340
2001................................................................. 9,416
2002................................................................. 9,460
Aggregate thereafter................................................. 79,004
<CAPTION>
-----------------------
<S> <C>
$ 124,445
<CAPTION>
-----------------------
-----------------------
</TABLE>
Rent expense, including deferred lease liabilities, for the years ended May
31, 1995, 1996 and 1997 was approximately $7,108, $8,653 and $10,169,
respectively. Such amounts include additional rent of $1,726, $1,863 and $2,136,
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
F-19
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
8. LEASES: (CONTINUED)
and defined amounts based on the operating results of the lessee. The leases
expire at various times through May 31, 2005. Future minimum rentals receivable
under noncancelable leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MAY 31, MINIMUM ANNUAL RENTAL
- --------------------------------------------------------------------- -----------------------
<S> <C>
1998................................................................. $ 527
1999................................................................. 466
2000................................................................. 375
2001................................................................. 375
2002................................................................. 338
Aggregate thereafter................................................. 650
------
$ 2,731
------
------
</TABLE>
Rental income, including noncash rental income, for the years ended May 31,
1995, 1996 and 1997, was approximately $831, $882 and $936, respectively. Such
amounts included additional rental charges above the base rent of $499, $570 and
$620, respectively.
9. STOCKHOLDERS' EQUITY:
A. CAPITALIZATION:
The Company's certificate of incorporation, as amended on December 10, 1996,
provides for the issuance of up to 2,050,000 shares of capital stock, consisting
of 1,150,000 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 $0.01 per share, (Class A and Class B are collectively referred to
herein as "Common Stock") and 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.
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 $1,005 as of May 31, 1997. 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 $9 as of May 31, 1997. Series B stockholders are entitled to
a cumulative 14% annual dividend based upon the per share price of $35.
Accrued dividends on all Series of 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.
F-20
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY: (CONTINUED)
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 stockholders.
B. STOCK OPTIONS AND WARRANTS:
The following table summarizes the stock option activity for the years ended
May 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
CLASS A COMMON SERIES B
($0.01 PAR CLASS A COMMON CLASS B REDEEMABLE SERIES B
STOCK OPTIONS VALUE) ($.001 PAR VALUE) COMMON PREFERRED PREFERRED
- --------------------------------------- ---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Number of shares under option:
Outstanding at June 1, 1994.......... 150,000 121,000
Options granted...................... 150,000 -- 21,251
Options exercised....................
Options cancelled.................... (150,000) -- --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1995.......... 150,000 121,000 21,251
Options exercised.................... (13,358) (2,351) --
Options cancelled.................... (6,642) (349) --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1996.......... 130,000 118,300 21,251
Options granted...................... -- 57,142(a) 20,000(b) -- 164,783(b)
Options exercised.................... (130,000) -- (138,300) (21,251) --
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1997.......... -- 57,142 -- -- 164,783
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average exercise price:
Outstanding at June 1, 1994.......... $ 3.00 $ 10.00
Options granted...................... 3.40 -- $ 3.00
Options cancelled.................... 3.00 -- --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1995.......... 3.40 10.00 3.00
Options exercised.................... 2.40 9.89 --
Options cancelled.................... 2.40 9.89 --
<CAPTION>
---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1996.......... 3.55 10.06 3.00
Options granted...................... -- $ 1.00 6.00 -- $ 10.00
Options exercised.................... 3.55 -- 9.47 3.00 --
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Outstanding at May 31, 1997.......... -- $ 1.00 -- -- $ 10.00
<CAPTION>
---------------- ----------------- ---------- ----------- -----------
---------------- ----------------- ---------- ----------- -----------
</TABLE>
- ------------------------
(a) Option exercise price equal to market price on the grant date.
(b) Option exercise price less than market price on the grant date.
F-21
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes stock option information as of May 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE WEIGHTED- ------------------------------
EXERCISE NUMBER REMAINING AVERAGE NUMBER WEIGHTED- AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXCERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ----------- ---------------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Class A Common ($.001 par
value).................. $ 1.00 57,142 114 months $ 1.00 11,428 $ 1.00
Series B Preferred........ $ 10.00 164,783 294 months $ 10.00 164,783 $ 10.00
</TABLE>
CLASS A COMMON STOCK ($.001 PAR VALUE) OPTIONS:
Options vest based upon achievement of annual equity value attributable to
Common stockholders over five years, as defined. There are no option shares
reserved for future issuance.
SERIES B PREFERRED STOCK OPTIONS:
During the period between the grant date, December 10, 1996, and the
exercise date, the option agreements contain provisions whereby the options
exercise price will be reduced or in certain cases, the optionholder will
receive cash in accordance with a formula as defined. There are no option shares
reserved for future issuance.
During the years ended May 31, 1995, 1996 and 1997, in connection with the
granting of Series B Preferred Stock Options and Class A and Class B Common
Stock Options, the Company recognized a noncash compensation charge of
approximately $635, $1,967 and $5,933, respectively. The Company applied APB
Opinion No. 25 in accounting for its plans. Such charges represented the
difference between the exercise price of the respective options and the fair
market value as determined by the Board of Directors of the underlying
securities.
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 as prescribed in SFAS No. 123. There were no options granted during
the year ended May 31, 1996 and since option grants awarded during the year
ended May 31, 1997 vest over several years, 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.
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Pro forma net (loss) to common stockholders prepared in accordance with SFAS No. 123.................... $ (1,826)
---------
---------
</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. The weighted-average fair value of the options was $26.80. The
following weighted-average assumptions were used in computing the fair value of
options grants: expected volatility of 60%; risk-free interest rate of
approximately 6.5%; expected lives of five years; and a zero dividend yield.
F-22
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
9. STOCKHOLDERS' EQUITY: (CONTINUED)
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 and 10,000 warrants were exercised on December
10, 1996 with the remaining warrants outstanding and fully exercisable until
expiration on December 10, 2006.
10. ASSET ACQUISITIONS:
During the year ended May 31, 1997, the Company acquired the assets of three
separate fitness clubs. The purchase prices totaled $4,138 which included $1,888
payable at closing and the issuance, or assumption of notes payable totaling
$2,250.
During the year ended May 31, 1996, the Company acquired the assets of a
fitness club. The purchase price totaled $304, which included $35 payable at
closing and the issuance, or assumption of notes payable totaling $269.
During the year ended May 31, 1995, the Company acquired the stock of a
fitness club which had been managed by the Company. The purchase price totaled
$311, which included $95 payable at closing and the issuance of notes payable
totaling $216. In addition, the Company also acquired all of the assets and
liabilities of a health and fitness club for nominal consideration, canceled the
pre-existing management agreement, entered into a noncancelable operating lease
for the space previously occupied by former owner and assumed operation of the
club. The fair value of the net assets acquired, which included cash of $67,
exceeded the total consideration paid by approximately $80. Such difference has
been accounted for as a lease incentive and is included in other liabilities.
For financial reporting purposes, these acquisitions have been accounted for
under the purchase method and, accordingly, the purchase price has been assigned
to the assets acquired on the basis of their respective fair values on the dates
of acquisition. 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 respective consolidated
financial statements of the Company was not material.
11. REVENUE FROM CLUB OPERATIONS:
Revenues from club operations for the years ended May 31, 1995, 1996 and
1997, and for the three months ended August 31, 1996 and 1997 are summarized
below:
<TABLE>
<CAPTION>
MAY 31,
-------------------------------
1995 1996 1997
--------- --------- --------- AUGUST 31,
------------------------
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Membership dues.................................... $ 27,591 $ 35,800 $ 45,916 $ 10,109 $ 13,948
Initiation fees.................................... 436 1,849 3,308 712 982
Other club revenues................................ 2,411 3,147 4,940 936 1,598
--------- --------- --------- ----------- -----------
$ 30,438 $ 40,796 $ 54,164 $ 11,757 $ 16,528
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
</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:
The (benefit) provision for income taxes for the years ended May 31, 1995,
1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1995
-----------------------------------------
FEDERAL STATE AND LOCAL TOTAL
----------- ----------------- ---------
<S> <C> <C> <C>
Current.................................................. $ 442 $ 364 $ 806
Deferred................................................. (818) (529) (1,347)
----- ----- ---------
$ (376) $ (165) $ (541)
----- ----- ---------
----- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
FEDERAL STATE AND LOCAL TOTAL
--------- --------------- ---------
<S> <C> <C> <C>
Current................................................. $ 1,256 $ 911 $ 2,167
Deferred................................................ (964) (575) (1,539)
--------- ----- ---------
$ 292 $ 336 $ 628
--------- ----- ---------
--------- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------
FEDERAL STATE AND LOCAL TOTAL
--------- --------------- ---------
<S> <C> <C> <C>
Current................................................. $ 1,053 $ 762 $ 1,815
Deferred................................................ (1,226) (832) (2,058)
--------- ----- ---------
$ (173) $ (70) $ (243)
--------- ----- ---------
--------- ----- ---------
</TABLE>
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 components of the net deferred tax asset as of May 31, 1996 and 1997 are
summarized below:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Deferred lease liabilities............................................. $ 2,226 $ 2,966
Stock compensation..................................................... 1,060 1,846
Fixed assets........................................................... 781 1,153
State net operating loss carry-forwards................................ 123 100
Investment in affiliated companies..................................... -- 33
Deferred income........................................................ 1,431 1,835
--------- ---------
5,621 7,933
--------- ---------
--------- ---------
Deferred tax liabilities:
Accruals............................................................... (152) (153)
Investment in affiliated companies..................................... (37) --
Deferred charges....................................................... (1,234) (1,624)
--------- ---------
(1,423) (1,777)
--------- ---------
Net deferred tax asset, prior to valuation allowance................... 4,198 6,156
Valuation allowance...................................................... (284) (184)
--------- ---------
Net deferred tax asset................................................. $ 3,914 $ 5,972
--------- ---------
--------- ---------
</TABLE>
As of May 31, 1997, the Company has state net operating loss carry-forwards
of approximately $1,178. Such amounts expire between May 31, 2006 and May 31,
2009.
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>
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate............................................. (34)% 34% (34)%
State and local income taxes, net of federal tax benefit............... (9) 19 (6)
Reduction in valuation allowance....................................... -- -- (8)
Adjustment of prior year's tax refund.................................. -- -- 25
Other.................................................................. 1 -- 2
-- -- --
(42)% 53% (21)%
-- -- --
-- -- --
</TABLE>
13. CONTINGENCIES:
The Company is a party to various 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 and cash flows.
F-25
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALL FIGURES $'000, EXCEPT SHARE DATA
14. EMPLOYEE BENEFIT PLAN:
During April 1996, the Company implemented a 401(k) salary deferral plan
(the "Plan") which is available to eligible employees, as defined. 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 and
1997.
15. SUBSEQUENT EVENTS:
During June 1997, the Company acquired the assets of three fitness clubs.
The purchase prices totaled $4,116 which included $1,590 payable at closing, the
issuance, or assumption of notes payable totaling $1,946 and the utilization of
amounts paid under a purchase option agreement of $580. In addition, the Company
has entered into noncancelable operating leases which expire at various times
through May 31, 2013. Future minimum rental payments required under these leases
total approximately $11,600.
16. NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
A. BASIS OF PRESENTATION:
The consolidated financial statements as of August 31, 1997 and for the
three months ended August 31, 1996 and 1997 are unaudited. In the opinion of
management, these unaudited consolidated financial statements reflect all
adjustments necessary (which are of a normal recurring nature) to present fairly
the financial position and results of operations and cash flows for the interim
periods, but are not necessarily indicative of the results of operations for a
full fiscal year.
B. ACQUISITIONS:
Subsequent to August 31, 1997, the Company acquired the assets of three
fitness clubs. The aggregate purchase price totaled $3,200 which included $2,800
payable at closing and the issuance of notes payable totaling $400. In addition,
the Company has entered into noncancelable operating leases which expire at
various dates through May 2018. Future minimum rental payments required under
these leases total approximately $32,000.
C. SENIOR NOTE PLACEMENT:
On October 16, 1997, the Company issued $85,000 of senior notes. The senior
notes bear interest at an annual rate of 9 3/4%, payable semi-annually, due
October 2004. The senior notes are uncollateralized. Approximately $41,500 of
the proceeds from the issuance of the senior notes were used to repay existing
indebtedness.
In addition, the Company also replaced its $15,000 line of credit with a new
$15,000 line of credit. The new line of credit accrues interest based upon
either the bank's prime rate plus 1.5% or the Eurodollar borrowing rate plus
2.5% as determined by the Company. Interest is payable at various times as
defined and the new line of credit expires on October 15, 2002. The new line of
credit is collateralized by all the assets of the Company.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
REGISTRATION STATEMENT IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. NEITHER THE DELIVERY
OF THIS REGISTRATION STATEMENT NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS
REGISTRATION STATEMENT. THIS REGISTRATION STATEMENT DOES NOT CONSTITUTE AN OFFER
OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary......................................... 3
Risk Factors.................................... 15
Use of Proceeds................................. 19
Capitalization.................................. 20
Selected Historical Consolidated Financial
Data.......................................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 23
Business........................................ 28
Management...................................... 38
Security Ownership.............................. 43
Certain Relationships and Related
Transactions.................................. 45
Description of New Credit Facility.............. 46
Description of Notes............................ 47
The Exchange Offer.............................. 71
Certain Federal Income Tax Considerations....... 77
Plan of Distribution............................ 79
Legal Matters................................... 79
Experts......................................... 79
Available Information........................... 79
Index to Consolidated Financial Statements...... F-1
</TABLE>
$85,000,000
TOWN SPORTS
INTERNATIONAL, INC.
SERIES B
9 3/4% SENIOR NOTES
DUE 2004
DATED , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Sections 721 to 725 of the New York Business
Corporation Law ("NYBCL") which provide for indemnification of directors and
officers. Pursuant to Section 721 of the NYBCL, no indemnification shall be made
to or on behalf of a director or officer if a judgment or other final
adjudication adverse to the director or officer establishes that his or her acts
were committed in bad faith or were the results of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
or she personally gained in fact a financial profit or other advantage to which
he or she was not legally entitled. Section 402(b) of the NYBCL permits a
certificate of incorporation to set forth a provision limiting or eliminating
the personal liability of directors to a corporation or its shareholders for
damages for any breach of duty in such capacity, provided that no such provision
shall eliminate or limit the liability of a director (i) if a judgment or other
final adjudication adverse to him or her establishes that his or her acts were
in bad faith or involved intentional misconduct or a knowing violation of law or
(ii) that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled, or (iii) in certain other
cases specified in Section 719 of the NYBCL.
Article Eighth of Registrant's Restated Certificate of Incorporation
provides that, except to the extent limitation of liability or indemnification
is not permitted by applicable law: (i) a director or officer of the Registrant
shall not be liable to the Registrant or any of its shareholders for damages for
any breach of duty in such capacity, and (ii) the Registrant shall fully
indemnify any person made, or threatened to be made a party to an action or
proceeding, whether civil or criminal, including an investigative,
administrative or legislative proceeding, and including an action by or in the
right of the Registrant or any other enterprise, by reason of the fact that the
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant any other enterprise as a director, officer or
in any other capacity, against any and all damages incurred as a result of or in
connection with such action or proceeding or any appeal thereof.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among Town Sports
International, Inc., various Sellers and Option Holders and TSI Merger Sub, Inc.
2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., Town Sports International, Inc. and various sellers and Option
Holders of the Company.
3.1 Certificate of Incorporation of Town Sports International, Inc.
3.2 By-Laws of Town Sports International, Inc.
4.1 Indenture dated as of October 16, 1997 between Town Sports International, Inc. and
United States Trust Company of New York.
4.2 Purchase Agreement dated as of October 9, 1997 among Town Sports International,
Inc. and BT Alex. Brown, Inc.
4.3 Registration Rights Agreement dated as of October 16, 1997 among Town Sports
International, Inc., and BT Alex. Brown, Inc.
5.1 Opinion and consent of Kirkland & Ellis.
10.1 Amended and Restated Credit Agreement among Town Sports International, Inc.,
Various Lending Institutions, and Bankers Trust Company, as Administrative Agent
dated as of October 16, 1997.
10.2 Registration Rights Agreement dated as of December 10, 1996 by and among Town
Sports International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various
investors, Farallon Capital Partners, L.P., Farallon Capital Institutional
Partners, L.P., RR Capital Partners, L.P., Farallon Capital Institutional Partners
II, L.P., Canterbury Mezzanine Capital, L.P., and certain TSI shareholders.
10.3 Shareholders Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P.,
Canterbury Mezzanine Capital, L.P., and certain TSI shareholders.
11.1 Statement of Computation of Per Share Data
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Town Sports International, Inc.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
25.1 Statement of Eligibility of Trustee on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- ------------------------
* All exhibits have been filed previously.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifications Accounts
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered therein, and the
offering of such Securities at the time shall be deemed to be the initial BONA
FIDE offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the termination of the
offering; and
(4) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) That for the purpose of determining liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(6) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
In so far as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described under
Item 20 or otherwise, the registrant has been advised that in the opinion of the
Securities and exchange Commission such indemnification is against public policy
as expressed in the Securities At and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of New York, state of New
York, on January 9, 1998.
<TABLE>
<S> <C> <C>
TOWN SPORTS INTERNATIONAL, INC.
By /s/ MARK A. SMITH
-----------------------------------------
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and power of attorney have been signed by the following
persons on January 9, 1998 in the capacities indicated:
<TABLE>
<S> <C> <C>
By /s/ MARK A. SMITH
-----------------------------------------
Mark A. Smith
CHIEF EXECUTIVE OFFICER AND CHAIRMAN OF
THE BOARD (PRINCIPAL EXECUTIVE OFFICER)
By /s/ RICHARD PYLE
-----------------------------------------
Richard Pyle
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
By *
-----------------------------------------
Keith Alessi
DIRECTOR
By *
-----------------------------------------
Paul Arnold
DIRECTOR
By *
-----------------------------------------
Bruce Bruckmann
DIRECTOR
By *
-----------------------------------------
Stephen Edwards
DIRECTOR
By *
-----------------------------------------
Jason Fish
DIRECTOR
</TABLE>
*By: /s/ RICHARD PYLE
-------------------------
Richard Pyle
ATTORNEY-IN-FACT
II-4
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of independent accountants.......................................................................... S-2
Schedule II, valuation and qualifying accounts............................................................. S-3
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Town Sports International, Inc.
Our report on the consolidated financial statements of Town Sports
International, Inc. and Subsidiaries is included on page F-2 of the Form S-4. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page S-1 of this
Form S-4.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand, L.L.P.
New York, New York
July 24, 1997
S-2
<PAGE>
TOWN SPORTS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE YEARS ENDED MAY 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COL. C
ADDITIONS
COL. B ------------------------------ COL. E
------------- (1) (2) -------------
COL A. 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 valuation
allowance:
1995.............................................. $ 284 $ 284
1996.............................................. 284 284
1997.............................................. 284 (1) $ (100) 184
</TABLE>
- ------------------------
(1) Reduction of valuation allowance from the utilization of state net operating
loss carryforward which were no longer required.
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
2.1 Agreement and Plan of Merger dated as of November 8, 1996 by and among Town Sports
International, Inc., various Sellers and Option Holders and TSI Merger Sub, Inc.
2.2 Amendment to Agreement and Plan of Merger dated as of December 10, 1996 among TSI
Merger Sub, Inc., Town Sports International, Inc. and Various Sellers and Option
Holders of the Company.
3.1 Certificate of Incorporation of Town Sports International, Inc.
3.2 By-Laws of Town Sports International, Inc.
4.1 Indenture dated as of October 16, 1997 between Town Sports International, Inc. and
United States Trust Company of New York.
4.2 Purchase Agreement dated as of October 9, 1997 among Town Sports International, Inc.
and BT Alex. Brown, Incorporated.
4.3 Registration Rights Agreement dated as of October 16, 1997 among Town Sports
International, Inc., and BT Alex. Brown, Incorporated.
5.1 Opinion and consent of Kirkland & Ellis.
10.1 Amended and Restated Credit Agreement among Town Sports International, Inc., Various
Lending Institutions, and Bankers Trust Company, as Administrative Agent dated as of
October 16, 1997.
10.2 Registration Rights Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Canterbury
Mezzanine Capital, L.P., and certain TSI shareholders.
10.3 Shareholders Agreement dated as of December 10, 1996 by and among Town Sports
International, Inc., Bruckmann, Rosser, Sherrill & Co., L.P. and various investors,
Farallon Capital Partners, L.P., Farallon Capital Institutional Partners, L.P., RR
Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Canterbury
Mezzanine Capital, L.P., and certain TSI shareholders.
11.1 Statement of Computation of Per Share Data.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.
21.1 Subsidiaries of Town Sports International, Inc.
23.1 Consent of Coopers & Lybrand L.L.P., independent accountants.
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
24.1 Powers of Attorney (included in signature page).
25.1 Statement of Eligibility of Trustee on Form T-1
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
99.3 Form of Tender Instructions.
</TABLE>
- ------------------------
* All exhibits have been filed previously.
